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MATERIALS FOR THE STUDY 
OF BUSINESS 



Materials for the Study of Business 



Industrial Society. By Leon C. Marshall, xxiv-f- 1,082 pages, 
royal 8vo, cloth. 

Financial Organization of Society. By H. G. Moulton. xxii+790 
pages, crown 8vo, cloth. 

Principles of Accounting. By Albert C. Hodge and J. O. McKinsey. 
xiv-f-390 pages, 8vo, cloth. 

Law and Business. By William H. Spencer. 

Vol. I. Introduction, xviii+612 pages, 8vo, cloth. 

Vol. II. Law and the Market. Law and Finance. xviii-f- 

670 pages, 8vo, cloth. 
Vol. III. Law and Labor. Law and Risk-Bearing. Law 

and the Form of the Business Unit, xviii-j-654 

pages, 8vo, cloth. 

Business Administration. By Leon C. Marshall, xxiv-f- 920 pages 
8vo, cloth. 

Education for Business. By Leverett S. Lyon, xiv-j-618 pages, 
8vo, cloth. 

Social Studies in Secondary Schools. By a Commission of the 
Association of Collegiate Schools of Business, x+114 
pages, 12mo, boards. 

Forms, Records, and Reports in Personnel Administration. ByC. N. 
Hitchcock. 128 pages, 8vo, paper. 

IN PREPARATION 

The Technique of Business Com- The Worker in Modern Economic 
munication. Society. 

The Managers Administration The Manager's Administration 

of Risk and Risk ■ Bearing. f Labor. 

Managerial Accounting. ^ ^^ ConW q/ ^.^ 

Commercial Banking Policies Activities. 

Commercial Cost- Accounting. Government and Business. 

The Manager's Administration Jht p/, W Environment of 
of rinance. 



B 



uswess. 



The Place of the Market in Our 

Economic Society. Traffic and Transportation. 

The Manager's Administration The Psychology of Business Pro- 
of the Market. cedure. 



THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



BUSINESS ADMINISTRATION 



THE UNIVERSITY OP CHICAGO PRESS 
CHICAGO, ILLINOIS 



THE BAKER & TAYLOR COMPANY 

NEW YORK 

THE CAMBRIDGE UNIVERSITY PRESS 

LONDON 

THE MARUZEN-KABUSHIKI-KAISHA 

TOKYO, OSAKA, KYOTO, PUKUOKA, SENDAI 

THE MISSION BOOK COMPANY 

SHANGHAI 



Business Administration 



BY 
LEON CARROLL MARSHALL 



ItTTtrtPSj- rir 




THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



H Fssoo 

, ii2> 



copyright iq2i bv 
The University of Chicago 

All Rights Reserved 



Published December 1021 
Second Impression January 1922 
Third Impression September IQ22 



OHft from 

Hon. Robert L, Owen 
Ncv. 4, '1931 



Composed and Printed By 

The University of Chicago Press 

Chicago. Illinois, U.S.A. 



PREFACE 

Collegiate training for business administration is now so widely 
attempted that the time has arrived when experiments should be 
conducted looking toward the organization of the business curriculum 
into a coherent whole. Training in scattered "business subjects >: 
was defensible enough in the earlier days of collegiate business training, 
but such a method cannot be permanent. It must yield to a more 
comprehensive organization. 

There can be no doubt that many experiments will be conducted 
looking toward this goal; they are, indeed, already under way. This 
series, "Materials for the Study of Business," marks one stage in such 
an experiment in the School of Commerce and Administration of the 
University of Chicago. 

It is appropriate that the hypotheses on which this experiment is 
being conducted be set forth. In general terms the reasoning back 
of the experiment runs as follows: The business executive administers 
his business under conditions imposed by his environment, both 
physical and social. The student should accordingly have an under- 
standing of the physical environment. This justifies attention to 
the earth sciences. He should also have an understanding of the 
social environment and must accordingly give attention to civics, law, 
economics, social psychology, and other branches of the social sciences. 
His knowledge of environment should not be too abstract in character. 
It should be given practical content, and should be closely related to 
his knowledge of the internal problems of management. This may be 
accomplished through a range of courses dealing with business admin- 
istration wherein the student may become acquainted with such mat- 
ters as the measuring aids of control, the communicating aids of 
control, organization policies and methods; the manager's relation 
to production, to labor, to finance, to technology, to risk-bearing, 
to the market, to social control, etc. Business is, after all, a pecuni- 
arily organized scheme of gratifying human wants, and, properly 
understood, falls little short of being as broad, as inclusive, as life 
itself in its motives, aspirations, and social obligations. It falls 
little short of being as broad as all science in its technique. Training 
for the task of the business administrator must have breadth and 
depth comparable with those of the task. 

vii 



Vlll 



PREFACE 



BASIC ELEMENTS OF THE BUSINESS CURRICULUM 



Of problems of adjustment to 
physical environment 

a) The earth sciences 

b) The manager's relationship 
to these 

Of problems of technology 

a) Physics through mechanics, 
basic, and other sciences 
as appropriate 

b) The manager's administra- 
tion of production 

Of problems of finance 

a) The financial organization 
of society 

b) The manager's adminis- 
tration of finance 

Of problems connected with the 
market 

a) Market functions and mar- 
ket structure 

b) The manager's administra- 
tion of marketing (including 
purchasing and traffic) 

Of problems of risk and risk- 
bearing 

a) The risk aspects of modern 
industrial society 

b) The manager's administra- 
tion of risk-bearing 

Of problems of personnel 

a) The position of the worker 
in modern industrial society 

b) The manager's administra- 
tion of personnel 

Of problems of adjustment to 
social environment 

a) The historical background 

b) The socio-economic insti- 
tutional life 

c) Business law and govern- 
ment 



Control 

i. Communicating aids of control, 
for example 

a) English 

b) Foreign language 

2. Measuring aids of control, for 

example 

a) Mathematics 

b) Statistics and accounting 

3. Standards and practices of con- 

trol 

a) Psychology 

b) Organization policies and 
methods 



PREFACE IX 

Stating the matter in another way, the modern business admin- 
istrator is essentially a solver of business problems — problems of busi- 
ness policy, of organization, and of operation. These problems, great 
in number and broad in scope, divide themselves into certain type 
groups, and in each type group there are certain classes of obstacles 
to be overcome, as well as certain aids, or materials of solution. 

If these problems are arranged (i) to show the significance of the 
organizing and administrative, or control, activities of the modern 
responsible manager, and (2) to indicate appropriate fields of train- 
ing, the diagram on the opposite page (which disregards much over- 
lapping and interacting) results. It sets forth the present hypothesis 
of the School of Commerce and Administration concerning the basic 
elements of the business curriculum, covering both secondary school 
and collegiate work. 

In this curriculum the present volume is designed to serve as 
part of a general introduction. It is used as the basic material in a 
beginner's course in Business Administration. This course parallels 
another dealing with the physical environment of business and 
follows still another which considers social environment. The three 
courses thus constitute a survey of the physical and social environ- 
ments of business and a general analysis of the outstanding relation- 
ships of the business administrator. 

In its scheme of presentation I think of this volume as being made 
up of four parts. Chapter i, a very brief first part, presents a general 
view of the field of study and a certain mental attitude toward the 
field. Because I have no better term for this mental attitude, I call 
it a functional approach to the study of business administration. 
Chapter ii, a somewhat longer second part, examines a business 
problem — that of plant location — as a means of giving the student 
confidence in the analysis of business problems which is sketched 
rather abstractly in the first chapter and as a means of inducing him 
to think of the outstanding relationships of the administrator as 
highly interdependent activites. 

Chapters iii-ix form a rather bulky third part of the book. 
Here, one after another of the functions of the business adminis- 
trator is discussed, with particular reference to the character of the 
problems involved and to the control policies and devices of the 
manager. The reader will find that the book is a "what and why" 
book rather than a "how" book. It is not a manual of technical 



x PREFACE 

practices and devices in business. It is an attempt to see the prob- 
lems of business administration as an interrelated whole and to 
indicate the lines of study which will presumably lead to solution of 
those problems. 

Chapter x, the brief fourth part, presents in moderate detail a 
"business case" for the student to analyze. It is a sort of an acid 
test of his earlier study. 

From the point of view of teaching technique, this study of 
business administration is worked out through what is called, again 
for lack of a better name, the discussion method. Questions, prob- 
lems, and cases are the tools of the discussion method and all are 
employed in this book. 

Some ways of using these tools may be illustrated as follows: 
If a class were given an ordinary textual reading on plant location 
and the class meeting were conducted by asking such questions as, 
"What are the more important factors in cotton mill location?" it 
would be possible, at least, to get a discussion started among members 
of the class, although it must be admitted that the meeting might 
degenerate into formal routine questioning and answering. If, on the 
other hand, the class were given a full account of the procedure 
followed by the Spin well Company in determining an appropriate 
location for its new plant, we could readily have a discussion par- 
ticipated in by the students as a result of their analysis of this case 
material. Case study by students presumes a knowledge at the 
outset of the main factors to be considered. The questioning on 
the part of the instructor would almost necessarily go deeper into 
the matter than routine questioning and answering. The student 
would be almost certain to carry away a more vivid appreciation of 
the issues at stake, because in the case method the mind is aroused 
to activity to piece together related facts in order to find new mean- 
ing in them. 

A third possible tool of the discussion method is the problem, 
and this may be of almost any grade of severity and may of course 
be combined with case material. If, for example, the Spinwell 
Company case contained an analysis of several possible locations 
without reaching a conclusion on more than one, the class discussion 
might well analyze the correctness of this conclusion or might be 
directed toward listing in order of preference the three most desirable 
locations, giving reasons for the order chosen. This would probably 
be a problem of only moderate severity if the case were well written 



PREFACE XI 

up. A more severe problem could be set by asking the class to deter- 
mine whether a certain location, not mentioned in the case, would 
not have been still better than the one chosen. Now the students 
must presumably secure new data concerning this new location as 
their first step in solving the problem. This brings in of course a 
new opportunity for mental discipline. 

As the present book is designed for use in an introductory course 
surveying the whole field of business administration, it does not 
include advanced problems. It embodies, none the less, a case 
and problem approach, and its emphasis is on the case and problem 
method, although as a transitional collection it has been thought 
wise to include enough material and questions of the more routine 
sort to enable the instructor to adapt his teaching method to the 
stage of maturity and preparation of individual students and classes. 
The final chapter — in my mind the most interesting bit of teaching 
method in the book — is a "case" of rather wide reach. It has been 
my experience that Freshmen can and do handle this case reasonably 
well at the close of the course: a stimulating hint of the possibilities 
for more advanced courses. 

Perhaps it is worth adding that there is no question that these 
possibilities can be realized. For more than a decade the group 
with which I am so fortunate as to be working has been developing 
a case-and-problem presentation of economics and business subjects. 
We find the method particularly well adapted to our intermediate 
and advanced courses, and much of our instruction in these fields 
is now on the case-and-problem basis. This of course does not 
mean that the lecture and the textbook do not have an appropriate 
place in instruction. 

It will be noticed that no effort has been made to give exhaustive 
bibliographies. It has seemed sufficient in an introductory survey, 
to suggest at the end of each chapter a few references for further 
study. The most modest library can meet the demand thus made. 

It is hardly possible for me to give appropriate recognition of the 
assistance I have received from many sources during the preparation 
of this material. It has passed through three mimeographed editions, 
two pamphlet editions, and a "preliminary" edition to its present form. 
During this rather lengthy period of preparation criticisms and 
suggestions have flowed in from almost every member of the group 
with which I am most closely associated as well as from many other 
collegiate instructors. My debt to authors and publishers who 



xii PREFACE 

have so kindly consented to the use of their material is equally great. 

I must mention particularly the assistance of Walter Smith, Ruth 

Reticker, Mildred Janovsky, May Freedman, and Dorothea Schmidt 

in gathering material and the kindness of Professor CO. Hardy in 

preparing the chapter on "The Administration of Risk-Bearing." 

A conscientious effort has been made to give credit where credit 

was due. I am quite certain, however, that many questions have 

been taken from sources whose origin has been forgotten in the long 

period of preparation. General acknowledgment of this indebtedness 

is here given. 

L. C. Marshall 

University of Chicago - - 

September i, 1921 



TABLE OF CONTENTS 

PAGE 

Chapter I. The Field of Business Administration 

The Many Forms of Economic Activity (Diagram) ... 2 

The Zones of Business Control 3 

A Descriptive Classification of Business Activities ... 4 

A More Analytical Classification of Business Activities . . 7 

A Functional Classification of Business Activities ... 10 

Administration a Phase of the Co-ordination of Specialists . 16 

Problems 20 

Chapter II. A Sample Business Problem — Plant Location 

A. Conditions Determining Location in Terms of Broad Areas — 
Territorial Specialization 

Introduction and Problems 23 

1. A General Survey of Location Forces. E. A. Ross . . 28 

2. Transportation Facilities in Relation to Location. A. T. 
Hadley ; 33 

3. The Momentum of an Early Start and the Habit of 
Industrial Imitation. Bureau of the Census .... 35 

4. Some Economic Advantages of Specialized Centers. 
Henry Clay 37 

5. The Location of the Cotton Manufacturing Industry. 

M. T. Copeland 38 

6. Local Concentration of Certain Industries. Bureau of 

the Census 45 

7. The Location of the Manufacturing Industries of the 
United States. Bureau of the Census 48 

8. Illustrations of Concentration and Dispersion. Bureau 

of the Census 49 

9. The Seats of Great Commercial Enterprises. /. R. 
Smith 50 

10. The Location of the Wholesale Dry-Goods Trade. 

P. T. Cherington 56 

11. London and New York as Financial Centers. E. L. S. 
Patterson 58 

B. Factors Determining Location in Subareas — Site Location 
Introduction and Problems 62 

12. Geographical Specialization by Small Areas and the 
Sections of Cities. C. C. Evers 64 

13. The Location of Retail Establishments. P. H. Nystrom 66 

sail 



XIV TABLE OF CONTENTS 

PAGE 

14. Site Location Considerations. C. C. Evers .... 71 

15. An Outline of the Relations of Transportation to Site 
Location. F. M. Simons, Jr 74 

16. The Interdependence of Construction and Equipment 

with Site Location. Charles Day 76 

17. City, Suburbs, or Country. D. S. Kimball .... 79 

18. Satellite Cities. G. R. Taylor 80 

19. The Causes of Congestion of Manufactures in New 
York City. P. T. Sherman 84 

C. Changing Location and Location Planning 

Introduction and Problems 90 

20. How to Strike a Balance in Location Factors. H. V. 

Coes 93 

21. An Example of Private Enterprise in Developing Plant 
Locations. Central Manufacturing District .... 96 

22. Another Example — the Bush Terminal 101 

23. Still Another Example — the Toledo Factories Buildings. 

Iron Age 105 

24. Examples of City Advertising 

A. Philadelphia Year-Bo ok 106 

B. Advertisement in a Business Periodical .... 108 

25. What City Planning Means. Niagara Falls Chamber of 
Commerce 109 

26. The City-Planning Movement. C. M. Robinson . . in 

Chapter III. The Administration of Personnel 

A. Introductory Survey of the Content of the Manager's 
Relationship to Personnel 

Introduction and Problems 115 

1. Organization of the Personnel Department. Ordway 
Tead and H. C. Metcalf 118 

2. Functions of the Personnel Department. C. H. Fen- 
stermacher 124 

3. Another Statement of Functions. R. W. Kelly ... 126 

B. Personnel Administration in Terms of Incentive and Out- 
put: Good Physical Conditions and Competent Human 
Machines 

Introduction and Prob'ems 127 

4. Some Causes of Inefficiency in Modern Industry. F. E. 
Cardullo 132 

5. Physical Conditions of Work and Accident Prevention. 

L. K. Frankel and Alexander Fleisher 136 

6. Prevention of Occupational Disease. L. K. Frankel 

and Alexander Fleisher 138 



TABLE OF CONTENTS XV 

PAGE 

7. The Maintenance of Physical Fitness. United States 
Public Health Service 140 

8. Physical Examination of Workers. J. W. Schere- 
schewsky 144 

9. Selection and Placement. N. D. Hubbell 146 

10. Education and Training 

A. The Industrial Information Service 149 

B. C. R. Allen 151 

C. Personnel Administration in Terms of Incentive and Out- 
put: the Will to Do 

Introduction and Problems 153 

11. The Fears of Labor and of Capital. W. L. M. King . 164 

12. The Gulf between Labor and Capital. L. P. Alford . 168 

13. The Instincts and Motivation. C. H. Parker ... 168 

14. The Release of Human Energy. A. D. Weeks . . . 171 

15. Wage Incentive: Forms of Payment. G. D. H. Cole . 173 

16. Wage Incentive: A Philosophy of Management. C. B. 

Going 178 

17. Wage Incentive: A Wage Formula. G. D. Babcock. . 180 

18. Wage Incentive: What Are Fair Wages? 

A. W. R. Bassett 181 

B 183 

19. Profit Sharing: Its Forms. U.S. Bureau of Labor 
Statistics, and Mallory, Mitchell, and Faust .... 183 

20. The Three-Position Plan of Promotion. F. B. Gilbreth 

and L. M. Gilbreth 185 

21. Employees' Representation 

A. Definition. Independence Bureau 187 

B. An Extreme Case. A Suggested Plan for a Con- 

ference Committee on Industrial Relationships . 188 

C. Another Case. National Metal Trades Association 191 

D. Measuring Aids of Personnel Administration 

Introduction and Problems 192 

22. Strength Tests in Industry. F. S. Lee 195 

23. How Industrial Fatigue May Be Detected. United 
States Public Health Service 196 

24. Job Analysis. Personnel . . 197 

25. Some Sample Analyses and Descriptions of Occupations 

A. Curtis Publishing Company 202 

B. Emergency Fleet Corporation 203 

26. The Field of the Psychological Test. H. D. Kitson . 204 

27. Methods in Vocational Testing. H. L. Hollingworth . 206 

28. Army Intelligence Tests and Trade Tests. Beardsley 
Ruml 209 



xvi TABLE OF CONTENTS 

PAGF 

29. What Phrenology and Physiognomy Can Contribute. 

H. L. Hollingworth 213 

30. The Application Blank as a Measuring Device. R. W. 
Kelly . 219 

31. The Interview as a Measuring Device. R. W. Kelly . 220 

32. Some Aspects of Rating Scales. R. W. Kelly . . . 221 

33. The Labor Audit. Ordway Tead 224 

E. Organization and Administration of the Personnel Depart- 
ment 

Introduction and Problems 226 

34. The Case for a Centralized Personnel Department. 

5. H. Slichter 231 

35. The Place of the Personnel Department in the Business 
Organization. Ordway Tead and H. C. Metcalf . . . 236 

36. Organization Chart of Personnel Work in One Industrial 
Plant 241 

Chapter IV. The Administration of Market Problems 

A. The Knitting Together of Modern Spec'alists. L. C. 

Marshall and L. S. Lyon 243 

Problems 250 

B. Market Forces, Marketing Functions, and Market Structures 
Introduction and Problems 250 

1. The Forces behind Modern Market Structures ... 256 

2. Marketing Functions. L. D. H. Weld 262 

3. Methods of Sale and Advertising 

A. A. W. Shaw 268 

B. Johnson, Read & Company 271 

4. Conditions Which May Result in Organized Markets. 
Alfred Marshall 272 

5. Leading Wholesale Agencies. M. T. Copeland ... 274 

6. Marketing Agencies between Manufacturer and Jobber. 

L. D. H. Weld 277 

7. The Use Made of the Jobber. P. H. Nystrom ... 279 

8. Leading Retail Agencies. M. T. Copeland .... 282 

9. The Mail-Order Business. R. S. Butler, H. F. De Bower, 

and J. G. Jones 287 

10. The Local Retailer's Answer to Mail-Order Competition. 
Northwestern Druggist 289 

11. Some Characteristics of the Department Store. P. H. 
Nystrom 291 

12. The Manufacturer and the Department Store. R. W. 
Johnson 295 

13. The Origins of the Chain Store. P, H. Nystrom . , 296 



TABLE OF CONTENTS xvii 

PAGE 

14. Market Structures by Classes of Commodities. P. T. 
Cherington 299 

15. The Middleman in Distribution. A. W. Shaw . . . 303 

16. The Break Up of the Orthodox System of Distribution. 

P. T. Cherington 306 

C. Sales Management for a Manufacturing Business 
Introduction and Problems 308 

17. A Brief Statement of the Marketing Problems of the 
Manufacturer. M. T. Copeland 313 

18. Analysis of Product, Market, and Channels of Distribu- 
tion. Mac Martin Advertising Agency, Incorporated . 314 

19. Some Phases of Market Analysis. M. T. Copeland. . 319 

20. Some Phases of Commodity Analysis. C. C. Parlin . 323 

21. Measuring Aids in Salesmen Control 

A. Printers' Ink . 325 

B. D. L. Kinney 328 

22. Measuring Aids in Advertising Control. W. S. Zim- 
merman 329 

23. Measuring Aids Applied to the Social Environment. 

J. G. Fredericks, and F. M. Faker 331 

24. Measuring Aids May Result in Expense Standards. 
Harvard Bureau of Business Research 333 

25. Measuring Aids Reflected in the Profit and Loss State- 
ment. Harvard Bureau of Business Research ... 335 

26. Measuring Aids, Quotas and Budgetary Control. 

M. W. Mix 337 

27. Price Policies: What the Mark-Up Should Cover. 

A. M. Burroughs 340 

28. Price Policies: The Turnover. Wheeler Sammons . . 341 

29. Price Policies: The Determination of Market Price. 
Jacob Viner 343 

30. Price Policies of the Distributer. A. W. Shaw . . . 347 

31. Price Policies: Price Maintenance. R. H. Ingersoll and 
Brothers 351 

32. The Administration of Sales and Advertising. P. T. 
Cherington 352 

33. An Organization of the Sales Department. Bulletin of 

the Taylor Society 354 

D. The Work of the Purchasing Agent 

Introduction and Problems 362 

34. The Functions of the Purchasing Department. H. B. 
Twyford 365 

35. Buying for Retail Hardware Stores. H. P. Sheets . . 367 



xviii TABLE OF CONTENTS 

PAGE 

36. Measuring Aids: Testing in Connection with Purchasing. 
Waldon Fawcett 370 

37. Measuring Aids: A Sample Specification. General 
Supply Committee, U.S. Government 371 

38. Purchase and Stores under Unsystematized, Systema- 
tized, and Scientific Management. H. P. Kendall . . 374 

39. The Interdependence of Purchasing with Other Func- 
tions. A. C. Ward 378 

40. A Possible Purchase Department Organization. C. S. 
Rindsfoos . 381 

41. Organization of General Purchasing Department of 
Western Electric Company 384 

Chapter V. The Administration of Finance 

A. What It Means to Start and to Finance a Business 
Introduction and Problems 388 

1. Steps Involved in Starting a Business. C. W. Gersten- 

oerg . 389 

2. Promotion and the Promoter. W. H. Lough. . . . 390 

3. Methods of Financing an Enterprise. Francis Cooper . 392 

4. Working Capital and Fixed Capital. W. H. Walker . 396 

B. The Manager's Relationship to the Financial Organization 
of Society 

Introduction and Problems 398 

5. A General View of the Manager's Use of Our Financial 
Organization. H. G. Moulton 400 

6. Investment Credit Institutions Used Directly by the 
Manager 

A. The Underwriters. W. H. Lough 404 

B. Investment Banking and Bond Houses 

I. Lawrence Chamberlain . 407 

II. W. H. Lyon 409 

7. Commercial Credit Institutions Used Directly by the 
Manager 

A. The Commercial Bank. H. G. Moulton . . . 410 

B. Note Brokers, Commercial Paper, Commercial 
Credit and Discount Companies 

I. R. P. Ettinger and D. E. Golieb 413 

II. H. G. Moulton 414 

8. Some Financial Information Gatherers 

A. The Mercantile Agency. R. G. Dun & Co. . . 415 

B. The National Association of Credit Men. Pamphlet 417 

C. Forecasting Services. 5. P. Meech 420 



TABLE OF CONTENTS xix 

PAGE 

9. An Omnibus Financial Institution, the Trust Company 

F. B. Kirkbride and J. E. Sterrett 423 

10. Some Institutions Used Indirectly by the Manager 

A. Insurance Companies. A. S. Johnson . . . . 425 

B. The Savings Bank. W. H. Kniffin 426 

C. Stock Exchanges. F. M. Taylor 427 

D. Wall Street. S. S. Pratt ......... 428 

C. Financial Policies and Occasionally Used Devices 
Introduction and Problems 429 

11. The Meaning of Capital and Capitalization .... 433 

12. Corporate Securities Viewed as Instrumentalities 

A . 434 

B. W.H.Lyon 438 

13. A Classification of Stocks. J". Adams, Jr 440 

14. A Sample Stock Certificate 446 

15. A Classification of Bonds. F. A. Cleveland .... 448 

16. Recitals in Bonds. Andrew Squire . . . -. . . 450 

17. A Sample Bond 454 

18. Policies concerning the Kind and Amount of Securities. 

W. H. Lough 456 

19. Some Policies with Respect to Preferred Stock. W. H. 
Lough . . 458 

20. Policies with Respect to Open and Closed Mortgages. 

W. H. Walker 460 

21. Amortization Policies and Practices. W. H. Walker . 462 

22. Corporate Reorganization Policies. Stuart Daggett . . 465 

D. Financial Policies and Frequently Used Devices 

Introduction and Problems 469 

23. What the Balance Sheet Shows about Financial Matters. 

Paul Havener 475 

24. What the Profit and Loss Statement Shows 

A. Paul Havener 482 

B. Scovell, Wellington &* Company 485 

25. Financial Policies Reflected in Accounting Records. 

E. A. Saliers 486 

26. Types of Commercial Credit Instruments. H. G. 
Moulton 488 

27. Short-Term Loans and Trade Credit. W. H. Lough . 492 

28. What a Bank Wishes to Know before Making a Loan . 495 

29. Borrowing by Assignment of Accounts Receivable. 

C. W . Gerstenberg . 499 

30. The Meaning of Depreciation. F.A.Delano . . . 501 

31. The Sources of the Surplus. W. H. Lough .... 505 



xx TABLE OF CONTENTS 

PAGE 

32. Reserves and Other Uses of the Surplus. F. A. Cleve- 
land and F. W. Powell 506 

33. How One Firm Pulled through a Depression. Wall 
Street J ournal 510 

E. Organization for Financial Administration 

Introduction and Problems 512 

34. An Order Denning the Jurisdiction of a Treasurer. 
Walworth Manufacturing Company 515 

35. Two Organization Charts on Financial Administration 

A. New England Telephone and Telegraph Company . 518 

B. General Accounting Department of Western Electric 
Company 519 

36. Financial Standards 520 

37. Budgeting for Cash Receipts and Cash Disbursements. 
Boston Chamber of Commerce 520 

Chapter VI. The Administration of Production 

A. The Background of Modern Production 

Introduction and Problems 523 

1. A Brief Outline of the History of Science. E. S. Dana . 525 

2. What Can Science Contribute in the Future ? 

A. A Hint of the Contribution of Physics. R. A. 
Millikan 530 

B. A Hint of the Contribution of Botany. /. M. 
Coulter 533 

3. Technical Education. Thomas Nelson & Sons . . . 536 

4. The Engineering Profession. F. R. Hutton .... 539 

5. Some Consequences of Technological Industry 

A. The Transfer of Thought, Skill, and Intelligence 

I. D. S. Kimball 543 

II. American Society of Mechanical Engineers . . 544 

B. The Intellectual Effects of Machinery. J.A.Hobson 547 

C. Technological Industry Is Complex Industry . 550 

D. Technological Industry Is Frequently Large-Scale 
Industry. L. C. Marshall and L. S. Lyon . . 553 

E. Standardization in Manufacturing. R. F. Hoxie 555 

B. Manufacturing Functions with Particular Reference to 
Control 

Introduction and Problems 556 

6. An Illustration of What Is Involved in Modern Manu- 
facturing. J. V. Woodworth 560 

7. The Control Problem Illustrated by Layout and Routing. 

D. S. Kimball 563 



TABLE OF CONTENTS XXI 

PAGE 

8. The Control Problem Varies with Different Types of 
Industry 

A. 5. E. Thompson 565 

B. G. D. Babcock 567 

9. Five Organic Functions in Manufacturing Industry. 

A. H. Church 570 

10. A Sample of Problems Arising in Manufacturing Func- 
tions. Library of Factory Management 578 

n. Measuring and Communicating Aids: Inspection. 

A. D. Wilt, Jr 581 

12. Measuring and Communicating Aids: Graphic Produc- 
tion Control. C. E. Knoeppel 584 

13. Measuring and Communicating Aids: A Progress Chart. 

H. L. Gantt 586 

14. Measuring and Communicating Aids: Time Study. 

F. W. Taylor 588 

15. Measuring and Communicating Aids: Motion Study. 

F. W. Taylor 589 

16. Measuring and Communicating Aids: Classification and 
Symbols. H. H. Farquhar 591 

17. Measuring and Communicating Aids: Cost- Accounting 

A. The Distribution of Expense. C. B. Going . . 595 

B. The Services of Cost-Accounting. J.R.Wildman . 597 

C. The Basis of Manufacturing Costs. H. L. Gantt. 600 

18. The Control of Large- vs. Small-Scale Industries 

A. A Protest against Too Great Centralization. 

R. B. Wolf 602 

B. The Small-Shop Basis of Production. G.H.Haynes 604 

19. Some Organization Charts. S. H. Bullard, L. V. Estes, 

and Norman Howard 605 

Scientific Shop Management 

Introduction and Problems 608 

20. The Beginnings of Scientific Management. C. B. Going 610 

21. Scientific Management in Production 

A. H. S. Person 615 

B. F. W. Taylor 618 

22. Stages in Management. H. P. Kendall 621 

23. Control of Manufacture under the Taylor System. 

H. K. Hathaway ............ 624 

24. Steps in Installing the Taylor System. H. K. Hathaway 633 

25. Scientific Management and Labor. R. F. Hoxie ... 637 



xxii TABLE OF CONTENTS 

PAGE 

Chapter VII. The Administration of Risk-Bearing 

A. The Character of Business Problems and Business Judgments 
Introduction and Problems . . . . 644 

1. A Comparison of Problems in Production and Marketing. 

S. 0. Martin 647 

2. The Significance of the Human Equation in Business 
Problems . . 649 

3. The Formation of "Judgments." F. H. Knight . . . 651 

B. Some of the Leading Forms of Business Risk 

Introduction and Problems .'.... 654 

4. Some Leading Forms of Risk. John Haynes. . . . 655 

5. The Separation of Producer and Consumer Means Risk. 

A. T. Hadley 657 

6. Chance Means Uncertainty and Therefore Risk. G. H. 
Palmer 659 

7. The Interdependence of a Specialized Society Increases 
Risk. L. C. Marshall and L. S. Lyon 661 

8. Antagonism of Specialists Increases Risk. A. W. Small 663 

C. Ways of Dealing with Risk 

Introduction and Problems . . ... , . . . . 664 

9. Entrepreneurship and Administrative Qualities . . . 667 

10. The Prevention of Harmful Events and the Use of 
Research . ... . . . 669 

11. Elimination by Combination of Risks 

A. . . . ■ . . . . . . 671 

B. E. A. Ross. 672 

C. A. C. Pigou 676 

12. Some Risks of Investors and How They Are Met . . 678 

13. Insurance and Risk-Bearing ........ 683 

14. Risk-Bearing through Speculative Contracts 

A. The Typical Speculative Contract of Ordinary 
Business 687 

B. The Hedging Operations of an Organized Ex- 
change. S. S. Huebner 688 

C. Some Dangers of the Speculative Contract . . 690 

15. Guaranty, Suretyship, and Underwriting 692 

16. Organized Suretyship. American Surety Company . . 693 

17. The Place of Risk-Bearing in a Business Organization. 694 

Chapter VIII. The Form of the Business Unit 

Introduction and Problems 696 

1. The Tests of Efficiency of Forms of the Business Unit. 

L. H. Haney 703 



TABLE OF CONTENTS xxm 

PAGE 

2. Relative Importance of the Main Forms of the Business 
Unit 

A. The Position of the Corporation. W. I. King . 705 

B. Relative Importance in Manufacturing Industry. 
Bureau of the Census 706 

3. The Individual Proprietorship. M. H. Robinson . . 708 

4. Agency as an Organization Device. W. H. Spencer. . 710 

5. Ordinary Partnerships, Special Partnerships, and Mining 
Partnerships 

A. Thomas Conyngton. 714 

B. W. H. Spencer 717 

6. An Example of Ordinary Partnership Articles . . . 718 

7. Limited Partnerships and Partnership Associations. 

Scott Rowley 718 

8. An English View of Their Limited Partnership Act. 
Solicitor's Journal and Weekly Reporter 720 

9. Definition and General Nature of Joint Stock Companies. 

Scott Rowley 722 

10. Some Results of Incorporation. Thomas Thacher . . 724 

11. Historical Stages in the Corporation. W. F. McCook . 727 

12. Forms of Corporation Charter . . . . . . . . 730 

13. A Charter Object Clause. United States Steel Corporation 732 

14. The Powers of Stockholders. W. L. Kitchel .... 734 

15. Liability of Corporate Directors 

A. W. P. Rogers 739 

B. Frederick Dwight 742 

16. The Dissolution of a Corporation. W. L. Clark, Jr. . . 744 

17. Some Methods of Concentration of Control. L. H. 
Eaney 745 

18. Simple Business Trusts. L. H. Eaney 748 

19. Co-operative Industry. G. H. Powell 751 

Chapter IX. Basic Features of Administration 

Introduction and Problems 756 

1. The Mental Aspects of Administration 

A. Management and Its Two Great Instruments. 

A. H. Church 764 

B. An Analysis of "Business Judgment." F. A. 
Kingsbury 768 

2. There Is No Single Correct Form of Organization 

A. Russell Robb 778 

B. D. S. Kimball 783 

C. C. D. Murphy 785 



xxiv TABLE OF CONTENTS 

PAGE 

3. Some Statements on the Essentials of Organization 

A. " Dimensions " of Organization. Russell Robb. . 788 

B. "Laws" of Organization. C. E. Knoeppel and 
Company 791 

C. Management "Laws." L. V. Estes . . . . 792 

D. Administration as Leadership. E. D. Jones . . 794 

4. Some Types of Organization 

A. Line and Staff Organization. C. B. Going . . 800 

B. The Unit System. C. D. Hine 801 

C. The Committee System. D. S. Kimball . . . 806 

D. The Human Analogy. C.E. Knoeppel and Company 808 

E. The "Two-Plane" Plan of Organization. /. H. 

Van Deventer 810 

5. "Regulative Principles" of the Art of Management. 

A. H. Church and L. P. Alford 813 

6. Measuring and Communicating Aids of Control 

A. Statistical Reports for the Chief Executive 

I. H. S. Person 823 

II. M. T. Copeland 826 

B. Accounting as an Administrative Aid. A . C. Hodge 

and J. O. McKinsey 828 

C. Budgetary Control. Boston Chamber of Commerce 831 

D. Standardization 

I. G. C. Harrison 838 

II. H. K. Hathaway 840 

III. W. D. Fuller 841 

E. Economic Selection. /. C. L. Fish 842 

F. The Range of Time and Motion Study. R.F.Hoxie 844 

7. The New Industrial Leadership. E. D. Jones . . . 850 

Chapter X. Analysis of a Business Case 

Introduction and Problems 854 

A. The Engineer's Report 855 

B. The Accountant's Report 887 

C. The Prospectus 898 

D. Stock Subscription Form 903 

Index 907 



CHAPTER I 

THE FIELD OF BUSINESS ADMINISTRATION 

Purposes of this chapter: 

i. To recall to our minds the main forms of modern economic 
activity. 

2. To secure a bird's-eye view of the tasks of the business 
administrator. 

A study of the business executive is a study of a very important 
agent in the guidance of our economic activity. For better or for 
worse, this specialist has come to have a leading part in our modern 
" co-operation of specialists." It is the purpose of this book to give an 
introductory view of the tasks falling to his lot and of the methods he 
uses in accomplishing these tasks. 

Beyond question, these tasks and these methods vary from case to 
case. Modern industry has many forms and the problems of adminis- 
tration certainly are present in very different proportions in our differ- 
ent types of industry. In an introductory survey, however, the 
similarities rather than the differences may well be emphasized. 
Therefore, beyond presenting below a diagram designed to recall to 
our minds the many forms of modern economic activity, the material 
of this book will be presented on the hypothesis that, for educational 
purposes, the functions of administration are fundamentally the same 
in all businesses, however greatly the technique may vary. For 
the sake of having an illustrative case which may be carried through- 
out the whole discussion, these functions will be considered with 
particular reference to the work of a manufacturing and selling 
business. 

It is a pity to introduce a discussion of terminology into our 
work, but the terminology used in this field is by no means standard- 
ized. You will frequently find in your readings that a given word is 
used, even by the same author, in different senses. This may even 
occur within the limits of a single sentence. It follows that the 
context must be watched if one is to be clear how certain terms are 
used. Since the center of our problem is "control of business activi- 
ties," such terms as " organization " and " administration" come up 



2 BUSINESS ADMINISTRATION 

very frequently in our discussion. Probably little would be gained 
by an arbitrary standardization of these terms at this stage of our 
study. It will suffice for us to bear in mind that "control of business 
activities" includes three things: (i) the establishment of policies, 
(2) the planning and setting up of the organization which is to be 
used in carrying out those policies, and (3) the operating or running 
of the organization. Organization implies a fairly high order of 
creative work; that of planning mechanisms, means, and devices to 
accomplish ends. Operation involves running the mechanisms set up 
by organization. Administration, if broadly conceived, would include 
both of these as well as policy formation. So conceived it might be 
used as synonymous with "control." 

THE MANY FORMS OF ECONOMIC ACTIVITY 1 





> 
Primary Industries < 


Hunting 
Fishing 
' Extractive I Grazing 

Lumbering 
( Mining f Tillage 
[ Agriculture < Plant Breeding 
k Genetic I Forestry [ Animal Breeding 
[ Fish Culture 


Modern 

Economic * 
Activities 


Secondary Industries « 


Manufacturing 
Transporting 
Storing 
Merchandising 




Personal and Profes- 
sional Services 


< 


Healing 
Teaching 
Inspiring 
Governing 
k Amusing, 


r 

etc. 



An illustration 2 will perhaps serve to make clear this use of terms. 
The following skeleton organization chart of a manufacturing business 
(any other business would have served as well for our purposes) 
is divided into three broad zones according to the character of the 
administration which obtains in those levels. Zone I is concerned 
with policy formation — with the setting of goals in a large way and in 
general terms. Zone II is concerned with planning and setting up 

1 Taken by permission from T. N. Carver, Principles of Political Economy, 
p. 192. (Ginn and Company, 1919.) 

2 This illustration is taken, with changes in terminology, from a note - by 
H. S. Person in the Journal of Political Economy, XXVIII (1920), no. 



THE FIELD OF BUSINESS ADMINISTRATION 



an organization to carry out these policies — to arrive at the goals. In 
this zone minor policies or sub-policies for the various departments 
are worked out by their chiefs in terms of the major policies of the 
business. It will be noticed that the general manager occupies a 
border-line position. He operates in both zones. Zone III is con- 
cerned with routine operations containing the veriest modicum of 
policy formation and very little work that can be called organizing 
work. From the point of view of control this zone requires only 
routine management. The planning room occupies the border-line 
position between this zone and the one above it. 

THE ZONES OF BUSINESS CONTROL 



Control 



Zone I 

Concerned with the de- 
termination of large 
policies 



Zone II 
Concerned with organi 
zation, formation of, 
minor policies, and 
" responsible" man- 
agement 



Zone III 

Concerned with "rou-' 
tine" management 



Stockholders 
Directors 
President 



General Manager 

Executive Staff 
Requirements Control 



Progress 



F Acco C unts d Desi g n Works Management Personnel Sales 



-Planning Room 



Foremen 
Clerks Workers 



Clerks 



Administration, as we are using the term, is concerned with all 
of these. They are phases of administration. The diagram should 
not leave, however, an impression that it is possible to draw sharp 
dividing lines between the various terms we are using. Routine man- 
agement shades off into responsible management and organization; 
organization shades off into policy formation; administration includes 
all of them, its creative work being done in Zones I and II. 

It was said above that our problem is that of understanding the 
controlling of modern business activities. This certainly involves 
studying two sets of issues : (a) what things are to be controlled, and 
(b) how the control is carried out. In this chapter, we are primarily 
concerned with getting a bird's-eye view of what matters are to 
be controlled, and one way of doing this is to formulate a generalized 
statement of the task of the modern administrator. 



4 



BUSINESS ADMINISTRATION 



I. Descriptively speaking, the task of the business executive ex- 
tends in two directions. Looking in one direction, he must organize, 
correlate, apportion, proportion, various elements entering into the 
internal operations of his business. The business world has generalized 
these operations under such headings as production, distribution, and 



A CLASSIFICATION OF BUSINESS ACTIVITIES 

(An Abbreviation of a Chart Issued by the 
A. W. Shaw Company) 

Location 



f Plant . 



A. Administration < 



Operation 



B. Production. 



Plant . 



Operatiop 



Construction 
Equipment 



Material 

(Paper repre- 
sentations 
of activities 
facilitated) 



Causal 
Purchase Requisitions Purchasing 

Plant and Equipment 

Materials and Supplies 
Employment Requisitions. .Employment 

Labor 
Shipping Requisitions Credits 

Finished Stock 
Resultant 

Outgoing Invoices Collections 

Vouchers Finance 

Records Recording Division 

Plant and Equipment Accounting 

Material and Supplies Auditing 

Labor Costs Department 

Statistics Department 



Agencies Office Executives and Employees 

Organization Office Management 

Labor Supply 
Raw Materials 
Nearness to Market 
Transportation 

Location j Power 

Financial Considerations 
Legal Limitations 
Advertising Value 
Physical Site 
Environment 



Construction 



Equipment . 



Material . 



Labor . 



Organization . 



' Type of Building 
Character of Building 
, Financial Considerations 

■ Product to Be Manufactured 

Labor Available 

Design of Machinery 
[ Financial Considerations 

[Kind 
I Quality 
Control 
[ Utilization 

[ Hiring 
I Paying 
I Training 
[ Handling 

I Types in Use 

Line or Military 

Line and Staff 
. Functional 



THE FIELD OF BUSINESS ADMINISTRATION 



C. Distribution. 



Demand Creation 



Plant. 



Location . 



Closeness to Market 
Contact with Factory Force 
Supply of Salesmen 
Supply of Office Men 
Administrative Expense 
Superior Service Facilities for Adver- 
tising 
Currency of Sales Ideas 



Type of Building 
Construction. . •{ Character of Building 
Financial Factors 



Operation . 



Equipment . 



Material 

(Ideas about 
the goods) 



Agencies . 



Organization . . > 



f Plant. 



Physical Supply. . . 



Location . 



Construction. 



^Equipment . . 



f Operations to Be Performed 

i Labor 

[ Machinery 

(Kind 
Quality 
Quantity 
Control 

' Middlemen 
Direct Sales Force 
Advertising 

General 

Direct 

' Analysis of Market by 

Physical Areas 

Social Strata 

Trades or Industries 

Local or National 

Present and Future Demand 
Selection or Combination of Agencies 
Price Policies 



Central Warehouse 
At Factory 
At Center of 

Transportation 

Railroads 

Steamship Lines 

Parcel Post 

Express 
Branch Houses 

At District Markets 

Character of Product 

Facilitation of Packing and Shipping 

Fireproof 

Fire Resisting 

Inside 

Conveyers 

Elevators 

Assorting Tables 
Outside 

Switch Tracks 

Trucks 



Material Finished Product 



t Operation 



Agencies . 



Organization. 



Labor 
Transportation 

In Warehouses 

Public Carriers 

Parcel Post 
Public Warehousemen 

Selection or Combination of Agencies 
Middlemen 
Wholesalers 
Retailers 
Warehousemen 
Direct Means of Supply 
Branch Houses 
Retail Stores 
Local Agencies 



6 BUSINESS ADMINISTRATION 

administration. Some think of these terms as almost mutually 
exclusive. Others prefer to say that there are two main subdivisions 
of the internal problems of control, production and distribution, 
and that administration is a sort of plastic matrix enveloping and 
determining them both. The relative merits of these two methods of 
presenting the internal problems of business control are not here 
under consideration. It is evident that there are such problems. 
They are so clearly recognized that various schemes of classification 
can be presented. 

But this is not the whole story, perhaps not even half of it. Our 
business executive must, looking in another direction organize, 
correlate, apportion, proportion, various elements entering into the 
external operations of his business. Our individualistic age may not 
have ready any such comprehensive diagram of these external opera- 
tions as the business world has drawn of the internal operations, but 
there can be no question that they exist, and that they are as signifi- 
cant, as pressing, as ramifying, as the internal problems. Courses 
training to meet them are as truly "business courses" as are those 
concerned with the internal problems. 

A few illustrations may give sharpness to this statement. Sup- 
pose that our business executive, viewing the internal problems of 
control, concludes, and his conclusion is approved by his cost account- 
ant, that it would be profitable for him to use child labor in his 
factory, or that it would be profitable for him to work all his employees 
fourteen hours a day. Will he accordingly order these procedures to 
be carried out? Not if the law of the state in which he operates 
forbids it and he has reason to think the law will be enforced. Or sup- 
pose that his cost accountant demonstrates that it would be profitable 
to omit certain safety devices. It is clear that the law of the state 
may be more persuasive than the findings of the cost accountant. 
Or suppose that his sales manager demonstrates that a certain form 
of advertising would be profitable. If this form of advertising happens 
to run counter to the code of ethics of the Associated Advertising 
Clubs of the World, our business manager may not think it wise to 
follow the gleam of profits. Examples without number might be 
cited. It is clear that social control, whether in the form of law, or 
of a code of ethics, or of public opinion, or of a group of men as repre- 
sented by an employers' association and perchance by a trade union, 
may and does largely condition the policies adopted with respect to 
'uternal problems of business control. 



THE FIELD OF BUSINESS ADMINISTRATION 7 

But these external problems are by no means exclusively prob- 
lems of social control in the usual sense of the term. The form and 
structure of the industrial society in which the business exists are 
matters of vital significance to the executive. The form, structure, 
and functions of that society's financial institutions will go far to 
determine policies with respect to financial measures. A relatively 
narrow range of choices will be vested in the executive. The form, 
structure, and functions of the commercial organization of that 
society will practically fix his purchases and sales policies. Tech- 
nology and the reactions of people under that device known as the 
wage system will play their part. Thus indefinitely. Over all and 
through all, environment (external relations), social and physical, 
will largely determine the range of the activities of the business 
executive. The scant attention given physical environment in this 
discussion is in no sense due to any belief that it is unimportant. 
On the contrary, its importance is so easily recognized that, in the 
interests of brevity, a more complete treatment of this factor was 
purposely omitted. 

I do not know any satisfactory way of reducing this statement to 
diagrammatic form. Indeed, it is apparent that the classification 
"external versus internal problems" is itself crude and even mis- 
leading. It is apparent that the figure of speech to the effect that the 
business executive must accomplish the impossible task of looking 
simultaneously in two directions breaks down logically quite as 
much as it does physically. It is seldom true that he can look at 
internal problems and at external problems as separable issues. These 
so-called external problems determine the so-called internal problems 
and, possibly to a smaller extent, the internal problems determine 
the external problems. It is probably near the truth to say that the 
business executive administers an interacting complex which may, 
for purposes of discussion, arbitrarily be said to be made up of external 
and internal problems. 

A very useful classification of business activities, drawn appar- 
ently primarily from the point of view of the internal problems of 
control, but with clear recognition of the importance of external 
problems, is shown on pages 4 and 5. 

II. The problem of the business executive may be stated somewhat 
more analytically. Taking for granted the physical environment, 
the task of the business executive may be said to be conditioned by 
four overlapping, interacting determinants (possibly they should be 



8 BUSINESS ADMINISTRATION 

called variables): (i) technological matters, (2) value and price, 
(3) social environment, (4) continuous change. 

1. The modern business executive has much to do with techno- 
logical considerations. The development of such sciences as physics, 
chemistry, psychology, geology, has made available for practical 
application a great store of knowledge. The Industrial Revolution, 
the latest and the current chapter in the intervention of capitalism, 
has placed upon management the responsibility for the conduct of 
the processes of production in large-scale, group-labor, machine 
industry. It is no longer humanly possible for the manager to know 
all the technique of all the processes of production under his super- 
vision. In some cases the doctorate in our modern universities does 
not give sufficient training to cope with the technological problems 
even in a small subdivision of a business. But if the manager may 
not master all the technology involved, he should be intelligent with 
respect to it, and particularly he must be intelligent with respect to 
the relationships between processes. We are accordingly justified in 
regarding technological considerations as one of the main subdivisions 
of the business manager's problem. The precise form of the tech- 
nology will vary from business to business, and from one aspect to 
another of a given business. The general statement may be made, 
however, that the manager of a " manufacturing and selling" business 
will continually come into contact with technological problems, the 
proper administration of which will require training in such fields as 
physics, chemistry, geology, psychology, and the biological sciences, 
the field varying with varying circumstances. 

As one illustration of the presence of technological considerations, 
observe the mechanical problem in the producing end of a machine- 
shop. Let the trustees of some great endowment go to the production 
manager with this proposal: " We intend to free you from everything 
except technical problems. Disregard price and financial policy 
entirely. Take any grade or grades of land, take any grade or grades 
of labor, take any of the present forms of capital goods, and take any 
or all of these in any quantity you choose. Work out for us the best 
technical combinations." The problem would be a formidable, even 
a staggering, one, able as the production manager would be to sum- 
mon to his aid the fruits of generations of development in mechani- 
cal engineering. Years of patient research would be required. 
Similar problems having their bases in technological considerations 
other than those of mechanics will occur to everyone. Every manu- 






THE FIELD OF BUSINESS ADMINISTRATION Q 

facturing business finds them looming large, and probably no business 
is free from them. 

2. Baffling as are the technological aspects of the business man's 
problem, they are after all but the beginning of his difficulties. These 
technological difficulties are all shot through and through with vari- 
ables of value and price. Our business manager may not take 
any grade of land in any quantity he chooses ; he may not select any 
grade of labor in any quantity he chooses; he may not utilize any 
existing form of capital goods in any quantity he chooses. In every 
case price enters, and he must ask himself such questions as these: 
Will this grade of land for which I must pay x dollars be better for 
me than that grade of land for which I must pay y dollars ? Shall 
I use this grade of labor at this given price, or would it be better for 
me to use another grade of labor at a different price ? Shall I use this 
particular machine at this price, or shall I use one of the scores of 
other machines which will be furnished me at different prices ? And 
granted he has reached some solution of these questions, he knows 
that price is again the significant consideration in the disposal of his 
product. In all of these price intricacies the business man is largely 
the victim of circumstances. Unless he has monopoly power, he has 
as an individual very little to say concerning the price at which he may 
secure any factor of production, and still less to say concerning the 
price at which he may dispose of his product. In the pecuniary 
aspects of his problem he is grappling with forces which he must 
understand if possible, but which he can do little to control. 

3. Still further complicating the business manager's technological 
problems, shot through and through as they are with the variables 
of price, is the factor — variable — social environment. The modern 
business manager is not conducting his business up in thin air, nor 
is he located on a desert island. He is in the midst of organized 
society, and his operations are subject — more than he is likely to 
realize in our individualistic regime — to what we have come to call 
social control, both formal and informal, both conscious and uncon- 
scious. Quite aside from social control in the ordinary sense, the 
organization of society, with its whole psychological and institutional 
background, lays down limits to his freedom of operation. But this 
has already been sufficiently discussed for our present purposes. 

4. And there is a fourth factor, or variable or characteristic 
aspect, of all the foregoing factors — continuous change, the influence 
of progress — and this crisscrosses all the other factors. There are 



Io BUSINESS ADMINISTRATION 

changes in technique, some of which may result from an intensive 
study of his own business and some of which may be forced upon him, 
in this pecuniary, gain-organized, competitive business world, by 
outside inventions. The methods of production or of marketing may 
be revolutionized within a few years. There are changes in the price 
factor, some brought about by his own action, some brought about 
by the action of competitors, some forced upon both him and his 
competitors by happenings that to the lay mind have no conceivable 
bearing upon the business concerned. There are changes in the social 
environment, and these are typically little under his control. Indeed, 
in general terms, the individual will have little influence in determin- 
ing any or all of these possible changes. None the less, the slightest 
mis judgment of the actual course of events often means for the busi- 
ness but one outcome, failure. Woe to the business executive whose 
training gives him a static conception of business problems! 

One interested in training for business administration may well 
turn aside, at this point, to reflect that he has a key to the under- 
standing of much current gossip concerning such training. Some 
gossips urge as the best business training a good engineering course. 
It is clear that this is a helpful suggestion, for such a course would 
assist greatly in solving technological problems. Others urge work 
in economics, law, and the other social sciences. This suggestion 
certainly has merit. Following it would result in a knowledge of 
social control, social environment, and the laws of price. The study 
of history, presumably, or of some evolutionary science, would aid 
in preparing the future manager to meet the problems resulting from 
progress. These suggestions are all valuable, no doubt, but they 
are piecemeal suggestions. Training for business administration 
demands more than any (or all) of them provides. 

III. Perhaps what is involved in training for business adminis- 
tration may be seen with some sense of proportion if one states the 
tasks of the business executive in terms of the functions he performs. 
Summarily stated, the outstanding tasks of the executive are con- 
cerned with the following: 

i. His relationship to the physical environment 

2. His relationship to technology 

3. His relationship to the market 

4. His relationship to personnel 

5. His relationship to finance 



THE FIELD OF BUSINESS ADMINISTRATION II 

6. His relationship to risk and risk-bearing 

7. His relationship to the social environment 

8. His relationship to the coherent control of activities arising 
from the foregoing relationships. 

1. With respect to his relationship to his physical environment 
little need be said. This relationship is always present but it is of 
course more obvious in the primary industries (see p. 2) than in 
the secondary industries or in professional and personal services. 
In this relationship the manager comes into touch primarily with the 
problems of the earth sciences. He may or may not be an expert in 
these fields; the typical manager has only a general acquaintance 
with them. He relies upon the expert opinion of the geologist and 
the geographer. These experts are in some cases permanently 
attached to the business; in other cases they are merely called upon 
in connection with some specific task. 

2. Quite commonly we hear modern industry called "techno- 
logical" industry. One writer 1 states it a bit differently by remind- 
ing us that the economic activity of man has passed through three 
stages. There was first the appropriative period in which man 
"appropriated" commodities in their natural state. For example, 
he picked and ate berries or nuts. Later came the adaptive period 
which may be illustrated by the assembling of branches or stones to 
build a hut. He is today in the creative period in which science is 
the handmaiden of industry, and in which startling analyses and 
metamorphoses of commodities take place. 

With the development of our society a rich institutional life has 
sprung up in connection with the technological aspects of industry. 
The clearest illustration of this may be seen in the development of our 
schools of technology. The Industrial Revolution, notwithstanding 
the great increase of productive power which it gave us, ushered in 
an era during which the expansion of the market occurred even more 
rapidly. The need of the times was a steadily increasing productive 
capacity and the response was, in part, our schools of technology 
which applied the findings of science to agriculture, mechanics, 
mining, and other fields. 

The modern executive must operate in terms of this situation. 
As has been indicated above, he must, at the very least, be intelligent 
with respect to the technological aspects and implications of his task. 

1 Cf . Slosson, Creative Chemistry. 



12 BUSINESS ADMINISTRATION 

3. Our whole industrial society is in a sense a market society. A 
loan at a bank, the hiring of a worker at a factory, the ordering of a 
meal at a restaurant, the issuance of stocks and bonds of a corporation, 
the lease or purchase of a piece of land, the payment of tuition at a 
university — indeed, the major part of the business happenings of 
our daily life — are either market transactions or closely allied thereto. 
In making this statement, however, the term "market" is used in 
its broadest inclusive sense. The executive thinks of it in a narrower 
sense. To him it is the institution and procedure through which he 
secures his equipment and raw materials and through which he dis- 
poses of his finished product. 

Here, too, an interesting range of institutional life has developed — 
again partly in response to the needs of the executive. The whole- 
saler, the retailer, the jobber, the advertising agency, the mail-order 
house, the transportation systems, are some of the more common 
forms. The modern business executive deals with his market problems 
in terms of this institutional life round about him. If he has sufficient 
daring, initiative, and power, he will modify it to some extent. He 
may even start some new form of it. The typical executive, however, 
operates in terms of the institutional environment as it is. His 
purchasing agent and his sales agent utilize rather than modify the 
tools they find ready to use. 

4. The influence of social organization is quite as strikingly seen 
in the case of the executive's relation to the problems of personnel. 
Indeed, it is not too much to say that his personnel manager, or 
industrial-relations manager, or employment manager, or whatever 
he may be called, must operate not only in terms of the existing social 
organization but in terms of the historical development of that organi- 
zation. Only as a result of an awareness of the development of 
industrial relationships — at least during the last two hundred years — 
can the personnel manager cope satisfactorily with the modern 
problems connected with incentive and output. His administration 
of hiring, discharge, promotion, discipline, safety, health, sanitation, 
welfare, collective bargaining, wage rates, and all the other difficult 
tasks in personnel administration must be in terms of the laws, habits, 
social attitudes, and institutional life governing this field. Here also 
opportunity exists for initiative, exploration, and discovery. But the 
typical manager is likely to use rather than modify in any significant 
way the instruments already in existence. 

5. The case is not different with respect to the financial function 
and the administration of finance. Through several centuries devices 



THE FIELD OF BUSINESS ADMINISTRATION 13 

and institutions have been developing in this field. Stocks, bonds, 
promissory notes, investment banks, commercial banks, savings 
banks, insurance companies, the Federal Reserve System, Dun's, 
Bradstreet's, collection agencies, credit men's associations, the cor- 
poration itself, form the merest beginning of the list of such devices 
and institutions. The financial affairs of any business, manufacturing 
or commercial, large scale or small scale, are administered in terms 
of the financial organization of society. The range of choices open to 
the manager is relatively limited. 

6. Similarly also in the case of risk and risk-bearing. Modern 
industrial society is in its very nature a speculative society, the 
term being used with no opprobrium. The modern manager incurs 
risk in various forms resulting from almost innumerable causes. He 
meets these risks by means of institutions and devices. Of these the 
insurance company, of which there are dozens of forms, is the one 
more generally known. It is not, however, as important as is the 
speculative contract in its multitudinous forms. Any contractor 
who lets out, at fixed prices, sub-contracts in subordinate operations 
is relieving himself from the risk of price changes in these fields and 
such actions are multitudinous. Then, too, one must not overlook 
inquiry, research, and the growth of knowledge as factors in risk re- 
duction. An outstanding fact with respect to the development of 
knowledge is the removal of business happenings from the realm of 
the unknown to the realm of the non-specula tively known. Herein, 
in part, lies the explanation of the recent movement for the estab- 
lishment of bureaus of research in business houses. Herein, in part, 
lies the significance of knowledge as an economic function. 

7. The manager's relation to social control has already been dis- 
cussed in part. The institutional life connected with the functions 
enumerated above are forms or agencies of social control. The very 
fact that the manager operates in terms of this institutional life shows 
the extent to which he is subject to social control. If to this institu- 
tional life we add the forces of competition, private property, habit, 
custom, group psychology, public opinion, and finally of organized 
law, both written and unwritten, we have a social environment which 
envelops the manager's operations in as definite and influential a 
way as does his physical environment. 

8. We come, finally, to his relation to the coherent, balanced, 
control of the various activities of his business. Here several out- 
standing matters strike one's attention. In the first place, he will 
administer the various problems of his business in terms of some 



14 BUSINESS ADMINISTRATION 

established policy. This policy, the manager, influenced by his 
social surroundings and by his own individual attitudes and experi- 
ences, and by the owners if he is not himself the owner, must work 
out. In the second place, even a small business can be well con- 
ducted only in terms of a well-formulated organization. Various 
schemes of organization have been developed to meet varying needs 
in this respect. In the third place, modern business has become 
so large and so complex that measuring aids have been developed to 
give the manager more complete grasp of the control of his problems. 
Some of the best known of these are financial accounting, cost ac- 
counting, time study, mental testing, material testing, and specifica- 
tions. 

Let us return to our discussion of curricula designed to train for 
business administration. If the foregoing analysis of the tasks of the 
executive is accepted, the planning of the curriculum would presum- 
ably proceed along the following lines. The business executive admin- 
isters his business under conditions imposed by his environment, both 
physical and social. The student should accordingly have an under- 
standing of the physical environment. This justifies attention to 
the earth sciences. He should also have an understanding of the 
social environment and must accordingly give attention to civics, law, 
economics, social psychology, and other branches of the social sciences. 
A knowledge of environment is not sufficient, however. It must be 
supplemented with a range of courses dealing with business manage- 
ment wherein the student may become acquainted with such matters 
as the measuring aids of control; the communicating aids of control; 
organization policies and methods; the manager's relation to pro- 
duction, to labor, to finance, to technology, to risk-bearing, to the 
market, to social control, etc. Business is, after all, merely an 
organized scheme of gratifying human wants, and, properly under- 
stood, falls little short of being as broad, as inclusive, as life itself 
in its motives, aspirations, and social obligations. It falls little short 
of being as broad as all science in its technique. Training for the 
task of the business manager must have breadth and depth com- 
parable with those of the task. 

Stating the matter in another way, the modern business adminis- 
trator is essentially a solver of business problems — problems of busi- 
ness policy, of organization, and of operation. These problems, great 
in number and broad in scope, divide themselves into certain type 
groups, and in each type group there are certain classes of obstacles 
to be overcome, as well as certain aids, or materials of solution. 



THE FIELD OF BUSINESS ADMINISTRATION 



15 



If these problems are grouped (1) to show the significance of the 
organizing and administrative activities of the modern responsible 
manager, and (2) to indicate appropriate fields of training, the follow- 
ing diagram results: 

DIAGRAM OF OUTSTANDING RELATIONSHIPS AND 
FIELDS OF TRAINING 

Of Problems of Adjustment to Physical 
Environment 
Appropriate Fields of Training 

a) The Earth Sciences 

b) The Manager's Relationship to 
These 

Of Problems of Technology 
Appropriate Fields of Training 

a) Physics through Mechanics, 
Basic, Other Sciences as Ap- 
propriate 

b) The Manager's Administration 
of Production 

Of Problems of Finance 

Appropriate Fields of Training 

a) The Financial Organization of 
Society 

b) The Manager's Administration 
of Finance 

Of Problems Connected with the 
Market 
Appropriate Fields of Training 

a) Market Functions and Market 
Structures 

b) The Manager's Administration 
of Marketing (Including Pur- 
chasing and Traffic) 

Of Problems of Risk and Risk-Bearing 
Appropriate Fields of Training 

a) The Risk Aspects of Modern 
Industrial Society 

b) The Manager's Administration 
of Risk-Bearing 

Of Problems of Personnel 

Appropriate Fields of Training 

a) The Position of the Worker in 
Modern Industrial Society 

b) The Manager's Administration 
of Personnel 

Of Problems of Adjustment to Social 
Environment 
Appropriate Fields of Training 

a) Historical Background 

b) Socio-economic Institutional 
Life 

c) Business Law and Government 



Control 

1. Communicating Aids of Con- 

trol, for example 

a) English 

b) Foreign Language 

2. Measuring Aids of Control, 

for example 

a) Mathematics 

b) Statistics and Accounting 

c) Psychology 

3. Standards and Practices of 

Control 



16 BUSINESS ADMINISTRATION 

It will help us to understand modern business administration if 
we think of it as one means or method of co-ordinating modern spe- 
cialists. That it is such a means may be seen more clearly if we use 
historical perspective. 

The manager of the medieval shop may be called the undiffer- 
entiated or unspecialized manager. In one person, the master 
craftsman, was vested control of all the relationships of the business. 
He, practically unaided, not merely supervised but actually con- 
ducted production, purchasing, selling, risk-taking, and all other 
managerial functions. Nor was this a difficult task. Men worked 
together quite simply in the shop of the medieval craftsman. To 
begin with, it was tool industry, and the simple technological processes 
involved were readily mastered. Anyone of average intelligence 
could, so far as the technology was concerned, become a competent 
workman and later rise to the direction of industry. Then, too, 
production was on a very small scale, being conducted by the crafts- 
man in his own home with, perhaps, two or three helpers, who might 
well live in the home of the master. The relationships between the 
craftsman and his helpers were frequently almost as personal as 
modern relationships between father and son. Thus, both the character 
of the processes, the scale of operations, and the human relationships 
made it a simple matter to control production in the medieval shop. 

If the organization within the shop was simple, so also was the 
co-ordination of the shop with the rest of society. The market for 
which the shop produced was typically local and personal. Some- 
times the customer came to the shop and goods were made according 
to personal desires; sometimes the craftsman carried his goods to the 
little town market and sold them to his neighbors; seldom was the 
relationship between producer and consumer an impersonal one; 
seldom were there intermediaries who had to be knitted into an 
economic organization. Simple also was the social supervision of 
industrial activity. Social attitudes, church requirements, and gov- 
ernmental regulations were fixed largely by custom. Men absorbed 
this customary control in the very air they breathed. They did not 
have to study it. It became a part of them without their being 
conscious of it. We must not deceive ourselves concerning the 
implications of this simplicity. Life was meager, narrow, and mean. 
None of us would wish to return to such a life. We have examined 
it merely to see how simply and in what a personal way men worked 
together. Undifferentiated management sufficed in such a situation. 



THE FIELD OF BUSINESS ADMINISTRATION 17 

Into this simple industrial society there gradually crept forces 
making quietly but radically for change. The compass, gunpowder, 
the printing-press, explorations and discoveries, colonization, the 
religious reformation, the new birth of art, literature, and science, 
the growth of individualism, the rise of strong central governments — 
these are some of the outstanding forces which freed men's minds 
from customary control, developed the gain spirit, widened the market, 
increased specialization, and paved the way for more complex forms 
of working together. Generation after generation the change con- 
tinued, and finally there came in the eighteenth century that great 
explosion which we now call the Industrial Revolution. It blew to 
fragments the simple, personal co-operation of the past. This state- 
ment of fact is also one statement of the problem confronting modern 
management. The simple, direct ways of working together have 
been blown to fragments. Can any of the fragments be restored? 
What new ways of getting men to work together can be found which will 
be more in keeping with our modern complex, specialized, impersonal, 
interdependent, gain-organized society ? 

Fundamentally, the problem of working together today is one of 
knitting together the specialists and specialized institutions of modern 
society. In the interests of increased productive capacity, we have 
specialized our capital, our technological processes, our workers, our 
knowledge, our management, our producing territories — everything. 
In the case of the workers, this has meant that the non-specialized 
worker of earlier ages has become the worker in a single trade or 
occupation, as, for example, the lawyer, the physician, or the all-round 
mechanic; and these, in their turn, have been split up into workers 
who concern themselves with only one process of a trade or occupation, 
as, for example, the diagnostician, or the ordinary machinist; and 
these process specialists have, in their turn (provided the market has 
been wide enough to make it profitable), been split up into workers 
m detailed operations, such as the modern narrow machine specialist. 
Now, these thousands upon thousands of specialists must be knitted 
together into a great producing mechanism, if society is to gratify 
its wants and secure all those intangibles making for human progress. 
So also must the specialized capital, knowledge, and management be 
knitted together. 

All this is easily seen in the case of the operations within a plant. 
A child can see that the specialized workers, capital, and processes 
within a shoe factory must be organized into a producing mechanism 



iS BUSINESS ADMINISTRATION 

before shoes can be made. A child can visualize some of the tasks 
of the manager and his lieutenants in this connection. It is not so 
easy, however, to visualize the knitting together of the thousands of 
specialized plants and institutions of our society into a great, pro- 
ducing machine which takes in all society. As one method of visual- 
izing this process, notice a few of the specialized plants which must be 
lined up to provide us with shoes. Beginning with the ranch (and 
not going back to the specialists who have provided the ranch with 
equipment), we can mention at once the packing house, the tannery, 
the leather merchants, the shoe factory, the wholesaler, and the 
retailer. Here is a range of specialized institutions lined up to 
accomplish one task. But some of the specialists in this range, for 
example the packing house and the tannery, are participating simul- 
taneously in dozens of other ranges designed to accomplish dozens of 
other tasks. Modern industrial society is therefore a bewildering 
complex, a literal maze of crisscrossing, interacting ranges of special- 
ized plants, filled with specialized workers, machines, and processes, 
reaching out to accomplish thousands of purposes. And this is but 
the beginning. All these ranges are crisscrossed and served by still 
other ranges of specialized functional middlemen like carriers, bankers, 
insurance companies, or advertising agencies. All must, through 
social control and through the market, be welded into a balanced, 
want-gratifying machine, and woe is all society if the welding is 
seriously defective! 

In this there is nothing new. It is set forth merely to recall to 
our minds the conditions under which the modern manager and such 
lieutenants as the personnel manager, the sales manager, and the 
purchasing agent do their work. Whether wisely or unwisely it 
matters little for the present discussion, society in its desire for product 
has intrusted the task of organizing for production to the entrepreneur, 
who may or may not be his own general manager, and the work of 
any of his lieutenants can be seen in true perspective only when this 
fact has been realized. Crudely stated, it is as though society had 
said to modern management: " Modern specialists must be brought 
to work together. For part of this task, various groups, including 
that large group called the state, will be responsible. They will work 
through the agencies of social control and will powerfully affect 
apportionment of productive energy, controlling indeed your own 
operations in the tasks assigned to you. For part of the work you 
will be responsible and your agencies are mainly two, (i) authority 
and (2) the market. These are not separate and distinct. Your 



THE FIELD OF BUSINESS ADMINISTRATION 19 

authority will come to you mainly through the market. Through 
your control of property rights you may, by market operations, get 
command of land, labor, and capital, and these you may control by 
authority within your business unit. The co-ordination of your unit with 
the rest of society will be worked out through the market. You will 
come into contact with the market through your sales and purchases." 
As time has gone on, it has become clear that management itself 
must specialize if such burdens are to be carried. An authentic 
history of the differentiation of management has never been written. 
We know, however, that as the market widened, there sprang up 
functional middlemen, such as carriers, insurance companies, and 
banks, who (for a price) relieved the manager of some of his operations 
in such fields. We know also that, within his own organization, he 
began to use deputies or agents, such as the supercargo, the branch 
house, or the agent proper, in various managerial operations. As 
time went on, there came about such an increase in size of the business 
unit that the volume of " control work" reached the stage where men 
specialized in certain aspects of controlling and, to come down sud- 
denly to recent times, we find in a modern manufacturing business 
such functionaries as the production manager, the purchasing agent, 
the sales manager, the treasurer, the advertising manager, the per- 
sonnel manager, and the auditor. These are, of course, subordinate 
to the general manager, who may or may not be the owner of the busi- 
ness. He, more than any other functionary, holds a position kindred 
to that of the medieval craftsman — kindred, but very different indeed. 

POSSIBLE ORGANIZATION CHART OF A MANUFACTURING 

AND SELLING BUSINESS 

Stockholders 

Board of Directors 

Executive Committee 

President and 
General Manager 



Vice-President Purchasing Production Sales Personnel Legal 
in Charge of Manager Manager Manager Manager Counsel 
Finance 



I Selling Advertising 

Treasurer Auditor Force Manager 



20 BUSINESS ADMINISTRATION 



PROBLEMS 



i. Notice again the classification of industries on page 2. Why not train 
for business management by studying the management policies and 
methods of several firms from each type of industry ? 

2. State in a few words the "problem" of business administration. Is it 
different from the problem of school administration or sovernmental 
administration ? 

3. Just what is Shaw's classification of business activities (pp. 4, 5) designed 
to accomplish ? Is it a diagram of the proper organization of a business ? 
Is it a diagram of the various operations of business ? Is it a diagram 
showing how to locate the incidence of a given business problem ? To 
what type of business does it refer ? 

4. Are the "external problems" of the manager more difficult today than 
they were in 1300 ? Go into details in your answer. 

5. What do you, as a manager, need to know about public opinion? 
about government ? about developing codes of ethics ? 

6. What does "business law" include? Show why (or why not) the 
manager needs to have a knowledge of it. 

7. "No intra-organization policy can safely be determined without taking 
into account the attitude of society toward the activities involved." 
Explain. Cite instances or cases. 

8. Show by specific instances how the government controls the business 
man in his relations with (a) other organizations; b) his employees; 
(c) his customers. 

9. "The problem of the business manager is to sense public opinion and 
take steps to follow it before it is expressed in actual regulation." Is 
this true ? Should he always follow public opinion ? May he aid in 
forming public opinion ? 

10. How would you convince a modern business man that public opinion 
affects him quite as much as governmental laws and regulations ? 

11. What advantages do you see in classifying the problems of the manager 
into external and internal problems? What are the disadvantages 
of such a classification ? 

12. "The function of the general manager is to co-ordinate and direct 
production, distribution, and facilitation." "His function is to organize 
and administer his business in terms of its relationships to finance, 
personnel, market, risk, social control, and technology." With which 
quotation do you agree ? 

13. "The business manager's administration of his business is in terms of 
his physical and social environment and is conditioned by these environ- 
ments." Does this seem to you to be substantially true ? Give evidence. 

14. How should you go about securing a knowledge of the manager's 
physical environment ? the social environment ? 



THE FIELD OF BUSINESS ADMINISTRATION 21 

15. It is said that one of the manager's functions is concerned with his 
relations to technology. Cite as many instances as you can of the 
manager's need of understanding technological considerations in a 
mail-order business; in a retail store; in a bond house; in a bank; in 
a tannery. 

16. The manager of a very complex machine shop, himself a competent 
mechanical engineer, says that his technological ability represents not 
more than 15 per cent of his necessary equipment for management. 
If so, how is the other 85 per cent made up ? 

17. What is meant by saying that with respect to the price situation the 
business man is largely the victim of circumstances; that he is grappling 
with forces which he must understand if possible, but which he can do 
little to control ? 

18. "Woe to the business manager whose training gives him a static con- 
ception of business problems." Why or why not ? 

19. Why has accounting gained such an important position in the field of 
business ? Of what value is it to the business executive ? Of what 
value is economics ? psychology ? 

20. "Civilization is passing out of a period of traditional knowledge into 
one of scientific knowledge." As a means of clarifying your mind on 
this issue, try to estimate what percentage of business activities of 
today are ruled by tradition and what percentage by science. Does 
the percentage vary from industry to industry, from plant to plant, 
from place to place ? 

21. "Business has long been hampered by tradition." Can you cite 
instances? What advantages flow from the presence of tradition in 
business ? 

22. It is often said that a man will be more successful if he starts working 
from the bottom of the business, and then gradually advances; in this 
way knowing every detail of the business he may come to manage. 
What are the arguments for and against such a method ? 

23. "The manager should be able to inform his staff on any problems with 
which they have to deal." Is this true ? Should a manager know as 
much of accounting as his accountant and as much of packing methods 
as his shipping clerks ? Can a manager of a manufacturing department 
run his department successfully if he is not familiar with the processes 
or operations that go into his product? If he has to depend on his 
subordinates for information will he succeed ? What is your tentative 
conclusion concerning the qualities, training, and experience essential 
to successful management ? 

24. "An idea which is a great stumbling-block is the one that one of the 
fundamental divisions of a business is superior or inferior to another. 
Unless a logical and true balance is preserved, the development of the 
business will be one-sided, resulting in a mal-administration. Many 



22 BUSINESS ADMINISTRATION 

businesses are less successful than they might have been because the 
manager has gained his experience largely in one or two divisions." 
Can a man get experience in all divisions ? If not, is there any hope ? 

25. The earlier "captains of industry" and even many of those of today 
are certainly not conscious of any such analysis of their problem as is 
sketched in this chapter. Does this mean that the analysis is useless ? 

26. Assume some (different) problem in each of these fields: (1) tech- 
nology, (2) finance, (3) personnel, (4) marketing. Now show the 
interdependence of business problems by tracing the consequences of 
each of these problems in each of the other fields. 

27. "The talk of scientific management makes me weary. I have never 
read any of the stuff and yet my business is managed in scientific 
way. It is the result of years of study in which careful attention has 
been given to the best traditions in business. After all, the best proof 
that it is a scientifically managed business is to be found in the facts 
that it has grown from small beginnings to its present size; it has 
consistently paid dividends; it has accumulated a surplus; it has its 
stock regarded as one of the safest of investments." Reason with the 
writer. 

28. Why should social reformers and persons interested in establishing a 
new order of industrial society understand the problems of the business 
manager ? 

29. Consider the following facts: 

a) It is exceptional for a student to know before graduation what line 
of work or vocation he will enter. 

b) Most students go into the line of work which seems to present the 
best opportunities. 

c) Five years after graduation the student is usually not in the line 
of work in which he started. 

On the basis of these facts, tell what you think should be the outstand- 
ing features of a college course designed to train for business 
administration. 

30. Draw up an outline of the main points in this chapter. 

REFERENCES FOR FURTHER STUDY 

Jones, The Administration of Industrial Enterprises, chaps. 1, 7. 
Shaw, An Approach to Business Problems, chaps. 1. 2, 19. 



CHAPTER II 

A SAMPLE BUSINESS PROBLEM- 
PLANT LOCATION 

Purposes of this chapter: 

i. To prepare for the later discussion of the tasks of the manager 

(a) by convincing ourselves that the relationships sketched on 
page 15 are real and vital. 

(b) by becoming accustomed to thinking of these relationships 
as highly interdependent. 

2. Quite incidentally, to secure an elementary knowledge of the 
factors determining an appropriate location for a business unit. 



In a book committed to the discussion of business administration 
in terms of the outstanding relationship of the manager, it is some- 
thing of a digression to study a sample business problem before we 
have studied those relationships. The digression is, however, justi- 
fiable. We shall be more willing to undertake a somewhat detailed 
study of the various relationships of the manager sketched in the 
preceding chapter if the examination of some business problem dis- 
closes the fact that those relationships really are present. Then, 
too, examination of a problem will show that these relationships 
are quite interdependent. They are not separate, distinct, and 
individual. Our later detailed study of each of them will be far 
more profitable if their interdependence is always in the background 
of our thinking. 

The classification of economic activities on page 2 shows that 
there are many types of plants which are to be located. It will 
suffice for our purposes if we consider very briefly the case of the 
primary industries and then in more detail the location of manufac- 
turing, marketing, and financial plants. 

A. Conditions Determining Location in Terms of Broad Areas — 

Territorial Specialization 

First of all let us notice, for these industries, the general con- 
ditions which determine in what broad belts, areas, or zones (as 

23 



24 BUSINESS ADMINISTRATION 

contrasted with site location) such business units are likely to be 
found. Obviously enough, this really becomes a discussion of geo- 
graphical or territorial specialization. Selections i to 12, together 
with your general information and with general reasoning will serve 
as a basis of discussion of the following: 

PROBLEMS 

I. With particular reference to primary industries: 

1. "The primary industries cannot be separated from the natural resources 
upon which they depend." Is this true? What light does it throw 
upon the location of primary industries? on the relation of the 
manager to physical environment ? 

2. It has been said that climate determines the broad zone and that 
geographical and geological conditions determine what shall be the 
location within the zone of all primary industries dependent upon 
flora and fauna. Cite illustrations. 

3. Cite primary industries not primarily dependent upon flora and fauna. 
Does the statement of the preceding question apply to such industries ? 

4. What is meant by the statement "extractive and elaborative industries 
are linked together by technical as well as economic bonds" ? 

5. What is the central thought of the preceding questions ? 

II. With particular reference to manufacturing industries: 

1. In what types of manufacturing industries does accessibility to raw 
materials involve proximity to them ? 

2. "An assembling industry sometimes has as its raw material, the finished 
products of other plants." What light does this throw on problems 
of location of assembling industries ? 

3. "In manufacturing paving brick it has been estimated that the relative 
weights of clay, finished product, and coal required are approximately 
40, 30, and 3." Do these facts throw light on the question of location ? 
Do they answer the question ? 

4. "As far as materials are concerned, the test of a good location is not 
the cost of materials laid down, but the material cost of a unit of 
completed product." Explain, bearing in mind such factors as original 
purchase price, converting expense, labor expense, overhead, transporta- 
tion cost, buying expense, reliability of supply, and expense of reserve 
necessary. Do some of these go beyond the range of the quotation ? 

5. "If a plant grows so that its suppb'es and products demand large 
facilities for handling, and its consuming public is national or world- 
wide, then the question of markets is one of accessibility and not one 
of proximity." Explain. Are there such cases ? 



PLANT LOCATION 25 

6. In what cases does accessibility to markets typically involve proximity 
to markets ? 

7. Does whirlwind advertising, a trade-mark, and a good product free 
an industry from other location problems ? 

8. "Industries engaged in producing valuable, durable, material objects 
in wide demand are likely to have their plants concentrated in only 
a few localities; those engaged in producing bulky, or perishable, 
or non-material goods, or goods in narrow demand, are likely not to 
be thus localized." Do you agree? Can you cite instances? 

9. "The most important consideration in the selection of manufacturing 
sites is that of transport faculties." "Transportation which so often 
comes to a person's mind as a factor in industrial plant location is 
really of secondary importance. Transportation will develop when and 
where the goods demand it." Which quotation is correct ? Why ? 

10. "The location of a lace factory is not of importance because the trans- 
portation of raw materials and finished product is so small a proportion 
of the value of the product as to be negligible." Do you agree ? 

n. Explain how, from the point of lower freight rates and of lessened 
risk, it may be worth while to scatter the various plants of a concern 
over the country. Will this always be true or is it true only of certain 
types of industries ? 

12. "Water transportation is advantageous when it connects the plant 
with important sources of raw material or a good sales market." Would 
good water transportation be important to an industry which never 
made use of it ? 

13. "The strategic places for industries which involve important assembling 
and distributing functions are (a) points on competing waterways, 
(b) centers at which numerous competing railways converge, (c) loca- 
tions within influential commonpoint territory adjacent to the pre- 
viously mentioned centers, and (d) localities so influential in the supply 
of certain products as to enjoy favorable commodity rates on these 
articles." Explain. Cite several instances of each case. 

14. Are transportation matters primarily connected with physical environ- 
ment, or with social environment, or with market relationships, or with 
some other item in the diagram on page 15? 

15. Are manufacturing industries today as dependent upon proximity to 
sources of power as they were one hundred years ago ? Explain in detail. 

16. What industries need to be located so that they have accessibility to 
fuel supply ? What industries need to have this accessibility involve 
proximity ? 

17. "Capital is scarcely worthy of discussion as a locating factor because 
of its great mobility." Is this true? What would be the case if it 
were a problem of re-location rather than one of location ? 



26 BUSINESS ADMINISTRATION 

1 8. "Mere numbers of people do not necessarily make a suitable labor 
environment, and a good labor situation for one industry may be a 
poor one for another." Explain. 

19. What is meant by locating "so as to reap the advantages of being a 
' parasitic industry' as regards labor supply?" Do you know of any 
such cases? Is such a proposition socially desirable? Suppose the 
term used had been "complementary industry," what answers should 
you make ? 

20. " Speaking generally, satisfactory labor power will be found in a dense 
population." What are the elements of a satisfactory labor power? 
Is it true that they are generally found in a dense population ? 

21. "Concentration of establishments even of a like kind and direct com- 
petitors, improves the labor market, both for employer and employee, 
in many ways." Explain. 

22. "Labor is not sharply localized — like fuel and materials it may be 
transported, its prices in different markets tend to converge." Do 
you agree ? Why or why not ? 

23. What is meant by industrial imitation with respect to plant location ? 

24. "A range of special services and special facilities tends to develop 
around industries which are once established." Name and explain 
these special services and facilities. Does the quotation mean that 
it is a matter of indifference where the original settlement is made ? 

25. Draw up a list of the reasons why industries mutually attract one 
another. Is it true of like industries ? of unlike industries ? 

26. "The trend of manufacturing, geographically, is, therefore, an impor- 
tant factor in locating an industry and is worthy of careful consideration 
in locating a new plant or moving an old one." Why or why not ? 

27. "New England furnishes an interesting illustration of how the 
momentum of an early start may offset other factors connected with 
plant location." Explain. Do you agree ? 

28. " Governments have sometimes made and unmade industrial locations." 
State how that is possible. 

29. If you wished to locate a manufacturing plant and you had to choose 
among three places, equal in all respects, except that one had a poor 
labor market, another, inadequate supply of capital; and the third, 
poor transportation, which one should you choose ? 

30. Arrange in order of importance the following factors: (a) proximity 
to raw materials, (b) cost of transportation to market, (c) cost of 
land, (d) presence of cheap power, (e) supply of suitable labor, in each 
of the following cases: (1) electric smelting, (2) the manufacture of 
jewelry, (3) the manufacture of tile, (4) the manufacture of cotton 
cloth, (5) a canning industry. In cases where you are unable to make 
the ranking requested, wherein does your inability rest ? 



PLANT LOCATION 27 

31. Notice the table showing the concentration of certain industries. 
What types of industries are centralized in New York ? in Pennsyl- 
vania? Account for the centralization. 

32. The manufacturers of the United States are largely concentrated in 
the northern and eastern parts of the country. Account for this 
concentration. 

33. I am thinking of starting a cotton-spinning mill in the Chicago district. 
What factors should I have in mind ? 

34. Notice the reading on the location of the cotton-manufacturing 
industry. Make a list of the lessons which you draw from that 
reading. Is the diagram on page 1 5 helpful ? 

35. Think back over the preceding questions to determine whether there 
have been raised issues concerning the manager's relation to physical 
environment; social environment; personnel; markets; finance; risk- 
bearing. 

36. What cases have you seen in the study thus far of the interdependence 
of these relationships ? For example, were there any market relation- 
ships which involved financial considerations ? 

37. Draw up an outline of the main points in this section. 

III. With particular reference to marketing and financial industries: 

1. Why are distributing centers typically on some transportation route? 
"The cities that form the best sales markets are those where trade 
routes meet or toward which they converge." Why ? Give instances. 

2. "Another class of cities forming good markets is found in cities which 
are collecting and distributing points in an exceedingly productive 
area." Cite instances. 

3. What is the entrepot? Is it a result of historical accident or of eco- 
nomic causes? If the latter, what are the causes? Are its days 
numbered ? 

4. What is the distinction between "transaction or bargaining center," 
and "distributing center" ? Cite instances where a transaction center 
need not be a distributing center. Convert these instances into gen- 
eralization. Has the question any bearing on the problem of business 
location ? 

5. What forces cause a transaction center to emerge ? 

6. "Trade in manufactured goods continues to cling to the older dis- 
tributing centers and devious routings long after it is possible to 
make direct shipments." Why? 

7. You are to engage in a business dealing in ungraded goods. What 
does this mean with respect to location ? 

8. Shaw in his Approach to Business Problems speaks of the distributing 
problem as being made up of (a) demand creation, and (b) physical 
supplying of the goods. He says, "There are five simple solutions 



28 BUSINESS ADMINISTRATION 

of the problem of location of the plant for demand creation: (i) The 
sales plant may be at the factory; (2) at the largest neighboring city; 
(3) at the largest trade market; (4) at the chief city of the county; 
(5) a central sales plant at one of these locations with auxiliary 
or branch organizations." Cite some of the advantages of each 
solution. 
9. Notice the reading on the location of the wholesale dry goods business. 
What lessons do you draw from that reading ? 

10. Answer the same question with reference to the reading on London 
and New York as financial centers. 

11. What is meant by saying that cheap transportation made the Missis- 
sippi Valley the greatest homogeneous market the world has ever 
seen and that this fact goes far to explain how American manufacturers 
were (later) able to invade even Europe with their products ? 

12. In the foregoing questions on the broad location areas of financial and 
marketing businesses, were there problems of personnel ? of physical 
environment ? of social environment ? 

13. Draw up an outline of the main points in this section. 

1. A GENERAL SURVEY OF LOCATION FORCES 1 

First in importance in fixing the home of certain industries is the 
presence of natural deposits or supplies. This determines imperiously 
the location of mines, quarries, oil or gas wells, fisheries, lumber and 
fur industries, and the collecting of nitrates, borax, sponges, pearls, 
buffalo horns. Thus trie Chilean desert is the site of nitrate mines, 
the oyster industry haunts the Chesapeakes, dye-woods are furnished 
from tropical forests, while the sulphur pits of Sicily supply brimstone 
to all parts of the world. 

Besides the simple finding, digging up, breaking off, cutting down, 
dislodging, capturing, or bringing together of natural substances or 
growths, we often find these reduced, refined, prepared, preserved, or 
otherwise worked up before leaving their original locality. Here we 
may, in thought, distinguish two industries, one working on raw 
materials supplied by the other. Many elaborative processes are in 
this way attached to some extractive industry, and located with 
reference to it. The weaving of basketware established itself in 
Franconia, owing to the splendid growth of willowtrees in the 
neighboring valley of the Main. Most of the slate pencils of the 
world are made in the Thuringian forest, the site of the finest slate 
quarries. 

'Adapted by permission from E. A. Ross, "The Location of Inaustries," in 
Quarterly Journal of Economics, X (1895-96), 247-68. 



PLANT LOCATION 20 

Probably next in importance is nearness to the sources of raw 
or auxiliary materials. This consideration will have most influence, 
first, when the materials are bulky and heavy relatively to their value; 
second, when the finished product embodies but a small part of the 
materials employed or contains much greater value; third, when 
transportation facilities are backward, or the materials are produced 
in a mountainous district or in the interior of a country where the 
cost of transportation is unusual. These conditions are met with in 
the metal industries, so that ore is for the most part smelted near the 
mine, if fuel be forthcoming. The sawmills in turn invade the wilder- 
ness or follow up logging streams in quest of their material. While 
there is no great shrinkage in sawing logs into lumber, the greater 
ease of handling is sufficient to carry the sawmill to the logs instead 
of the logs to the sawmill. 

Here we bring in a new consideration — the fact that extractive and 
elaborative industries are linked together by technical as well as 
economic bonds. The perishability of the materials makes the loca- 
tion of the dependent industry in many cases something more than a 
matter of freight bills. Neither cane nor raw juice can be carried 
far without spoiling, for a similar reason salmon canneries will cling 
to the banks of the Columbia, while fruit and vegetable canneries 
will stick close to Maryland orchards and California ranches. Tnis 
tether that binds one industry to a certain spot, despite the economic 
attractions of other localities, is weakened by every new device to 
preserve form and stay decay. So far, the frozen meat cargoes and 
refrigerator fruit shipments are in the service of the consumer rather 
than of dependent industries; but we may yet see these industries 
set free to obey other forces of location. 

Whenever great heat is needed, it is impossible to ignore the 
sources of fuel supply. This, therefore, is of great importance in 
locating the metallurgical, chemical, and refining industries, the 
smelting, casting, rolling, or forging of iron or steel, the manufacture of 
brick, hardware, glass, stoneware, pottery, and porcelain. 

When coal is burned simply to develop steam power, its cost of 
carriage is not so great as to make nearness to source of fuel a prime 
desideratum in location. Its rival, water power, on the other hand, 
has not been portable in any form, and, if used at all, has to be used 
in strict connection with the falling water that generates it. Around 
eligible water power, therefore, settle industries employing heavy 
machinery, such as flour mills, planing mills, sawmills, and many 



30 BUSINESS ADMINISTRATION 

manufactures of wood and metal. The manufactures that seek cheap 
power are mainly those that receive the crude natural materials direct 
from the extractive branches, and impose on them their first and great- 
est change of form. For the more purely elaborative processes, lying 
nearer the consumer, labor and light machinery effect the trans- 
formations. 

A power site thus becomes the core of an industrial center. 
Lowell, Lawrence, Fall River, Concord, and other manufacturing 
towns on the streams tumbling from the granite hills of New England 
owe their rise to this cause. The South owes part of its growth to 
the falls in its rivers. Great milling centers, like Rochester, Niagara, 
and Minneapolis, are the result of cheap power. It is likely that, 
with the advent of the economical transmission of electrical energy 
to a distance from the place of generation, the value of the more 
eligible power sites will be enormously increased; while, on the other 
hand, the concentrating tendency being checked, the milling industries 
will be left free to follow other attractions. 

Sometimes a trade takes up its home where, as supplement to some 
other branch it can fill up an industrial chink. In Switzerland hand- 
carving maintains itself because not only can it be pursued in the 
winter and in the long evenings, but the occupation is so light as to 
refresh rather than to weary. The poultry industry is in most coun- 
tries scattered and conducted in a small way, because it fills a chink in 
farming, and up to a certain point costs almost nothing. A great deal 
of stock-raising is merely incidental to farming. The peach industry 
of Belgium is likewise a parasite. The clusters of site industries that 
grow up about packing establishments, refineries, or gas works, en- 
gaged in turning refuse into by-products, are also parasitic. We note, 
on a higher plane, the obvious connection between the literary and 
scientific life of an educational center like Leipzig and its prominence 
as a book mart. 

Climate is not only decisive for vegetal products, but appears to 
play no small role in locating manufactures. Partly to the fact that a 
very moist atmosphere is necessary in order to spin the finer cotton 
yarns is due the steady concentration of the cotton industry in 
Lancashire, where high hills inland keep off the dry east wind, and 
precipitate a copious downfall from the sea winds from the west. 

The residence of the consumer frequently determines the loca- 
tion of the industry. The whole groups of service industries of 
course follow the consume 1 *. In fact, the chief economic difference 



PLANT LOCATION 31 

between goods and services lies in the fact that the place of production 
of the latter is in relation to the consumer. Besides this, certain indus- 
tries that produce goods, such as tailoring, millinery, photography, 
and pharmacy, must refer to the person of the consumer. Repair, 
work settles near him. Confectioneries, bakeries, and market 
gardens must be near him to avoid deterioration of product. Daily 
newspapers are published where the readers dwell, in order to secure 
promptitude. The bulk and waste of artificial ice in transportation, 
as well as the bulk of coopers' products, compel them to be made 
where wanted. 

If raw materials, fuel, and power are necessary to production, 
no less are labor and specialized capital. The capital required for 
buildings and machinery is, however, rarely influential in locating an 
industry, because the buildings are locally supplied, while machinery, 
if brought from elsewhere, is transported once for all, and cannot 
therefore compete with material or fuel as a factor in location. 
Capital, the most mobile and dynamic factor of production, seeks its 
allies instead of requiring them to come to it. It effaces itself in the 
location of industries, consulting always the local affinities of the other 
productive factors. 

Labor is not sharply localized, as is natural power, for instance. 
Like fuel or materials, it can be transported; and, like them, its prices 
in different markets perpetually tend to converge. But the trans- 
plantation of the laborer entails the expense of transportation of him- 
self, family, and belongings, and all the costs in trouble, risks, and 
sentiment that attend a change of residence. While the elaborative 
industries performing the first operations on nature's products are the 
most regardful of nearness to materials, fuel, and power, the higher 
branches that fabricate finished goods are apt to attend more carefully 
to labor cost. In the manufacture of clothing, linen, underwear, 
gloves, boots and shoes, millinery, cigars, patent medicine, and cutlery, 
the cost of labor enjoys the controlling position. Apart, therefore, 
from the cost of moving materials or product, industries will tend to 
congregate in commercial centers, in order to profit by the cheapness 
of labor that results from a cost of living kept low by easy resort to a 
wide supplying area. 

Many items enter into the articles of union between labor and 
capital besides the matter of remuneration. Cash wages, prompt 
payment, notice of discharge, liability of employer, provision of fire- 
escapes, fencing of machinery, limited hours for women and children — 



32 BUSINESS ADMINISTRATION 

all these obligations, whether imposed by law or by labor organiza- 
tions, will, if unattended by heightened efficiency, be unfavorable 
to capital and may lead to its migration. So, too, industrial dis- 
turbances, rioting, frequent and prolonged strikes dispose capital to 
exodus if a more tranquil seat can be found. With more capitalistic 
methods of production, outlay for labor and material diminishes 
relatively to that for plant and machinery. This necessity for special- 
izing and sinking vast initial sums makes industry increasingly depend- 
ent on order, security, and continuity of conditions. Civil disorder, 
revolutionary changes, sudden alterations in laws, or even a vigorous 
reform policy, scare away capitalistic industries. On the other hand, 
docility of laborers, absence of trade unions or restrictive laws, unques- 
tioning submission to the terms offered by capital, attract an industry. 
Easy incorporation, light taxes, severe penalties for offences against 
property, lavish grants of authority to private watchmen, such as the 
Coal and Iron Police of Pennsylvania, prompt use of police or militia 
in labor disputes, pliant legislatures, complaisant courts, corrupt 
officials — all these, so long as they provoke no dangerous reaction, 
attract outside capital, and make a community the home of vast 
industrial investments. 

Occasionally we find industries confined to a certain locality 
because of dearth elsewhere of adequate technical knowledge and 
inventive talent. The manufactures of one country get a start, and 
by a recourse to native technique are able to keep their lead. In 
the manufacture of dental instruments and supplies Americans have 
unquestioned leadership, owing to their inventive faculty and to the 
constant stimulus afforded by a highly developed profession. Similar 
causes give them pre-eminence in the making of farm machinery, 
while the ingenuity with which utility and convenience are wrought 
into their implements and tools gives American hardware a great 
name abroad. The lead acquired by France in articles of beauty and 
taste is undoubtedly due to the presence of abundant and well-organized 
artistic ability. The high development of the chemical industries 
in Germany is connected with the ardent cultivation of chemical 
science in that country. While, of course, experts may be transported 
as any other factor in production, experience shows that an industry 
permanently dependent upon imported technical knowledge will pay 
high salaries and receive service less conscientious, responsible, and 
well considered than would be rendered by the same men at home. 



PLANT LOCATION 33 

The concentration of a scattered industry usually comes about 
by some locality outstripping the other centers and finally extinguish- 
ing them. The initial growth is due, of course, to some superiority 
of this locality over the others. But, as the center leaves its rivals 
behind, it acquires a momentum from the fact that the economies of 
concentrated industry now work in its favor as well as its special 
advantages. With these urging it in the same direction, one might 
wonder why the rising center does not go on killing out its small rivals 
over larger and larger areas and appropriating their business. But 
trees do not grow up into the sky, nor does an industrial center 
expand till it absorbs the custom of the globe. For this there are two 
chief reasons. One is that, as a place becomes more of a center, its 
special advantage tends to disappear. If it is water power, the 
multiplication of mills raises the cost of power till it is no longer 
cheaper than elsewhere. If it is accessible coal, the increase of con- 
sumption compels shafts to be sunk deeper and galleries to be cut 
farther till the local superiority has vanished. The other reason is 
that, as industry concentrates, the radius of the territory from which 
its materials and the subsistence of its dependent population are 
drawn, and of the territory over which the finished product is dis- 
tributed, increases; the average cost of transportation per unit of 
industry grows until its growth neutralizes the economics of further 
concentration. 

2. TRANSPORTATION FACILITIES IN RELATION 
TO LOCATION 1 

[The following selection, by its excellent portrayal of the general 
consequences of improvements in transportation will serve sufficiently 
to indicate what must be the consequences of particular rate struc- 
tures if they greatly favor certain localities or commodities. There 
is a further hint of the part played by rate structures in Selection 5.I 

The indirect results of these changes [improved transportation] 
are so far reaching that we can do little more than enumerate them. 
The most immediate effect of cheapened transportation is to increase 
the distance at which it is possible for producer and consumer to 

"Taken by permission from A. T. Hadley, "Economic Results of Improve- 
ment in Means of Transportation" in Lalor's Cyclopaedia of Political Science, 
Political Economy and the Political History of the United States, III, 929-30. 
(Mayhard, Merrill and Company, 1899.) 



34 BUSINESS ADMINISTRATION 

deal with one another. To the producer it offers a wider market, and to 
the consumer more varied sources of supply. Which party obtains 
the chief benefit of the change is determined by the special conditions 
of each particular case. On the whole, its operation is more uniformly 
beneficial to the consumers, as a class, because its temporary 
advantage for the producers so often leads to overproduction. But 
in any event, it results in doing away with a large part of the varia- 
tions in price between different localities. The price is made, not 
in a local market, but in the world's markets. In the case of less 
bulky manufactured products, these differences almost disappear, 
except as they are due to artificial obstructions. In agricultural 
products, they are on a vastly smaller scale than ever before. And 
not the least important point where this leveling effect is felt is in 
the rent of agricultural land in England and similarly organized 
countries. Nearness to market was not long ago a main advantage 
of high-priced land; now it has to contend on tolerably equal terms 
with competing land five thousand miles away. 

To comprehend the full meaning of this change, we have only 
to look at books on industrial organization, published in the early 
part of this century. The limits from which a large city could draw 
its various supplies were closely defined by distance. Fresh vegetables 
and fruits could only be produced for it within the narrowest circle; 
and successive circles of ground were almost necessarily devoted to 
different products, according to their different availability for trans- 
portation. Now, any improvement by which products could be 
profitably transported to a greater distance, led to a redistribution. 
It was no longer location which determined the business to be carried 
on in a particular spot, but natural advantages more or less inde- 
pendent of location. The market garden might be placed at a greater 
distance from the city, if by so doing a more fertile spot was secured. 
The factory might be located far away from the raw material, if 
other business inducements made it desirable. In short, the whole 
system of division of labor advanced to a new stage. Not only was 
each man employed for what he could do best, but he was given a 
chance to work in the place where he could do it best. And this 
change made itself strongly felt in international relations. Even the 
barriers raised by high protective tariff today should be less isolated 
by this than it would have been a few years ago by the mere cost 
of transportation with no tariff at all. It is the railroad and the 
steamship that determine where a new business shall be developed, 



PLANT LOCATION 35 

quite as often as the government policy. The grant of special rates 
and privileges to shippers is nowadays the most efficient kind of 
protection. 

It is this quickening and cheapening of transportation that has 
given such stimulus in the present day to the growth of large cities. 
It enables them to draw cheap food from a far larger territory, and 
it causes business to locate where the widest business connection is 
to be had, rather than where the goods or raw materials are most 
easily procured. And the perfection of the means of communication, 
the postoffice and the telegraph, intensifies the same result. 

3. THE MOMENTUM OF AN EARLY START AND THE 
HABIT OF INDUSTRIAL IMITATION 1 

The various advantages which have been described thus far can 
be expressed in dollars and cents. The places possessing these advan- 
tages attract manufacturers on account of the comparatively low cost 
there of producing and marketing goods. But these advantages, in 
almost all cases, account for localization only in its broader sense. 
They prescribe an industry's possible area, but they fail to explain 
the most marked form of localization — that within a single city or 
town or group of cities and towns. 

Somewhere within the possible area — made such because of the 
advantages just described — an enterprising man started the pioneer 
establishment of a certain industry. Why was this place chosen 
rather than any other within the possible area? Or why was this 
industry chosen rather than any other for which this place was suited ? 
This is the first problem, and the second follows naturally. Why, 
after the first factory had become established, was it to the advantage 
of competitors to choose the same spot for their establishments, rather 
than other localities within the possible area? The solution of the 
first problem in the case of any industry is to be found by reference to 
its early history in this country. 

In most cases it will be found that the original establishment of 
an industry in a locality was largely a matter of chance. The shoe 
industry in Lynn, Massachusetts, is a case in point. In the early 
colonial days this settlement had its quota of cobblers, who made as 
well as repaired the shoes for the region thereabout, but did not 
attempt a broader market. In 1750, however, John Adams Dagyr, 
a Welshman and a skilled shoemaker, settled in Lynn, and began to 

x Adapted from Twelfth Census of the United States, VII (1900), 210-14. 



36 BUSINESS ADMINISTRATION 

teach his apprentices the art of fine shoemaking. It soon became 
known that shoes were being made in Lynn nearly as good as the best 
made abroad, and as early as 1764 Dagyr was spoken of in a Boston 
newspaper as "the celebrated shoemaker of Essex." Had this man 
settled in Roxbury, Massachusetts, rather than Lynn, the bias toward 
shoe manufacturing might have become established in that quarter, 
and Roxbury instead of Lynn might today be one of the three great 
shoe centers of the United States. 

The nature of many a city's industry has been shaped in just this 
way, in the early days of its history, by the decision of one man. 
Instances of this might be cited in connection with the localization of 
collars and cuffs, hosiery and knit goods, jewelry, gloves, and fur hats. 

It is only after the first enterprise has succeeded in any locality 
that the real localizing process begins. The mainspring of this process 
is the habit of industrial imitation — a habit as powerful as it is uni- 
versal, and so important in this connection that it warrants a some- 
what closer analysis. 

It has been shown above that one of the normal requisites of an 
industrial locality is a good supply of local labor and local capital. 
Suppose the enterprising man establishes himself in such a community 
and succeeds there. His success proves that the economic conditions 
are favorable — that he is within the possible area of that industry. 
But it does more, it creates a local bias toward this particular industry. 
This bias affects all three classes necessary to its expansion: entre- 
preneurs, capitalists, and laborers. 

In the first place, entrepreneurs naturally choose the existing 
industry rather than establish a new one. On the assumption of a 
prosperous and growing town, there is continually arising a class of 
enterprising men who wish to embark in manufacturing for themselves, 
and they naturally choose an industry with which they are familiar — 
one which they have actually seen succeed. It requires courage to 
be an industrial pioneer; more courage, in fact, than most men possess. 
They have read, perhaps, of much larger profits being made in 
branches of manufacturing not carried on in their neighborhood; 
they may have visited towns in another part of the country where some 
such industry has been very successful, and they are tempted to estab- 
lish this industry in their town, rather than to imitate the establish- 
ment which has been operating there successfully. The chances are 
great, however, that they will resist the temptation of larger profits, 
in favor of what they regard as surer profits, and will choose the local 



PLANT LOCATION 37 

industry. The other industry may be just as safe, but the probability 
of success, if they follow the beaten path, has been emphasized to them 
each day as they have watched the smoking chimney of the local 
factory, and have noticed the rise of the proprietor from moderate 
circumstances to comparative affluence. Their choice of this industry 
becomes, therefore, almost inevitable. Moreover, it is probable that 
the men who thus launch out for themselves have been employees or 
foremen in the local factory. They are relatives, perhaps, of the pro- 
prietor, and are familiar with all the details of this industry, while in 
any other they would have all to learn. 

In the second place, the capital needed to finance the new establish- 
ment — in addition to that supplied by the new entrepreneur himself — 
is much more easily obtained if the new establishment is to produce 
the same line of goods as the one already in existence. If a loan is 
desired for the establishment of an outside and less familiar industry, 
there is naturally a raising of the interest-rate as a means of insurance; 
or the stock, if offered for sale, will for the same reason sell at a lower 
figure. 

In the third place, the best grade of local labor prefers to have 
employment in an industry which seems to offer a future rather than 
in one which seems in the nature of an experiment. This influence 
is comparatively slight, however, for all ordinary labor takes such 
employment as is offered without much questioning. 

4. SOME ECONOMIC ADVANTAGES OF SPECIALIZED 

CENTERS 1 

Whatever the influences which bring an industry to a district, 
the chief advantages of localised industry are all due to the opportuni- 
ties for greater specialisation which concentration affords. Where 
many firms engaged in the same industry are grouped together, the 
worker has a better market for his specialised skill and is encouraged 
to specialise still further. The employer has less difficulty in finding 
the kind of labour he wants. The industry can command a large 
number of special services which no single firm could afford, and no 
scattered industry could maintain. Among the most impoitant of 
such services is the specialised market. Liverpool and Manchester 
provide the cotton-spinner and manufacturer with facilities for getting 
their raw materials and disposing of their finished products which 

1 Taken by permission from Henry Clay, Economics, an Introduction for the 
General Reader, pp. 30-31. (The Macmillan Company, 1916.) 



38 BUSINESS ADMINISTRATION 

they could find nowhere else, and these facilities can be supplied only 
because the cotton industry is so strongly localised. Bradford is 
the centre of the woollen and worsted industry, and nine-tenths of 
the wool that enters the country is bought and sold on the Bradford 
Exchange. The goods of the locality advertise one another, making 
access to new markets easy and giving an advantage in old markets; 
merchants and other distributing facilities grow up; " to be a Hudders- 
rleld worsted manufacturer or a Galashiels or Hawick tweed manu- 
facturer is enough in itself to raise the individual out of the ruck of 
some sort of competition and to justify the asking of a certain price." 
Special transportation facilities and the provision of commercial intelli- 
gence can be arranged for a localized industry. Scientists, lawyers, 
accountants, find it worth their while to specialise in the problems 
peculiar to the local industry. Insurance can be effected cheaper. 
Probably the use of credit can be obtained cheaper where risks and con- 
ditions are so well known as they are in a modern specialised locality. 
An important type of specialised services is the growth of sub- 
sidiary industries, supplying the staple industry with its machinery 
and incidental requirements of manufacture, and utilising its 
by-products. The making of machinery is less localised than other 
great industries, because the requirements of a modern localised 
industry are so special that they can best be met by a firm on the 
spot. The textile districts are the seat also of the dyeing and finishing 
trades, specialised to suit the particular material manufactured in 
the district; and these in their turn attract certain chemical and 
drysalting trades. The complete utilisation of by-products is one 
of the most important economies of modern industry, and is possible 
only where a localised industry makes a large bulk available without 
transport charges. 

5. THE LOCATION OF THE COTTON MANUFACTUR- 
ING INDUSTRY 1 

[This selection should be regarded as a bit of case material. It 
should be read with the mind searching for evidence that in plant 
location there arise matters connected with the relationships sketched 
on page 15.] 

New England. — Till 1880 the cotton-manufacturing supremacy 
of New England was not threatened. But when mills began to 

1 Adapted by permission from M. T. Copeland, The Cotton Manufacturing 
Industry of the United States, pp. 27-53. (Harvard University Press, 191 2.) 



PLANT LOCATION 39 

spring up in the South like mushrooms, grave fears were entertained 
for the future of the industry in the section where it had first taken 
root. These fears have now almost entirely disappeared, since by 
readjustment and economy the New England manufacturers have 
given evidence of being able to keep their foothold. 

Within New England the mills are still scattered, but certain 
localities have grown faster than others. The reasons for the more 
rapid growth of the industry in these places are the advantages 
which accrue from centralization in general, and the natural advan- 
tages possessed by the different localities in particular. In the 
early growth of the cotton manufacturing industry in New England 
the factor which determined the location of the mills was water 
power. Fall River, Lowell, Lawrence, Manchester, Nashua, Saco, 
Lewiston, and other cities grew up because of the water power 
which was available at those points. Although water power is still 
a very important factor in the continued prosperity of several of 
these cities, during the last half-century steam has become more 
important in supplying power for cotton mills. 

The more rapid growth of the industry in southern New England 
cannot be ascribed to water power. Fall River and New Bedford 
do not rely upon that to a great extent. Nor is the reason to be found 
in labor conditions, since the more northern cities possessed as large 
and as skilled a supply of labor as Fall River and New Bedford, when the 
latter cities began to forge ahead. Nor is the location of machine and 
repair shops the reason, since Lowell is well provided for in that respect. 

One reason, as Mr. Sidney Coolidge has pointed out, is the advan- 
tage which the tide-water cities gain in transportation rates. This 
saving, however, is not in the rates on raw cotton, since for that por- 
tion (about 40 per cent) which is shipped to the North by rail, a 
blanket rate is given for all New England and the railroads meet the 
water rates. Neither does the advantage arise in the freight on the 
cloth, since practically the same rate is paid from all sections of 
New England to New York or the West. The tide-water mills, how- 
ever, are able to obtain their coal at lower rates, inasmuch as the 
charges from Boston to points north are relatively high. The cost 
of discharging coal is about the same in Fall River and New Bedford 
as in Boston, and in the former cities it can be sent directly to the 
mills without further transportation. Thus, as the use of steam 
power has become more and more common, cheaper coal has favored 
the cities of southern New England. 



40 BUSINESS ADMINISTRATION 

Climatic conditions have been another reason for the more rapid 
increase in the number of spindles in that district. In that particular 
locality the temperature is less variable and the atmosphere more 
humid than in the neighboring regions. The climate has been par- 
ticularly adapted to the* manufacture of fine yarn and cloth. 
Although the natural advantage of humidity has been partially equal- 
ized elsewhere by artificial humidifiers, the greater stability of the 
temperature retains its potency. 

Middle Atlantic states. — The number of spindles reported for the 
Middle Atlantic states in i860 was 1,042,000; in 1900, 1,647,000; 
and in 1905, 1,548,000. Thus since i860 the industry has been 
practically stationary in this section. 

Cotton factories are located in Pennsylvania, New York, and 
Maryland, and a few are found in the other states of this group. 
But Philadelphia is the only point at which there is a concentration. 
In the Philadelphia district small weaving establishments are par- 
ticularly numerous; three-fourths of the mills in the United States 
which weave but do not spin are located in Pennsylvania, chiefly in 
Philadelphia, and the average number of looms per mill is only 10 1. 
Textile manufacturing is a long-established industry in that city and 
immigrant labor was probably employed there sooner than in New Eng- 
land. The immigrants, however, who entered the textile industries of 
Philadelphia were more or less experienced in textile manufacturing 
and therefore could be employed in the production of more fancy 
fabrics. Thus we can account, at least in part, for the existence of 
these mills and the character of their product. The labor supply 
has been the chief asset, supplemented by machine-shops and market 
facilities. The textile industries of Philadelphia, moreover, are 
urban enterprises dependent on urban conditions and in that respect 
are more or less analogous to the clothing industries of New York. 

The South. — The cotton-manufacturing industry has grown up in 
the South within the last thirty years, or since 1880. From 1900 
to 1905 the rate of increase was more rapid than ever before, but at 
the present time a more conservative tendency is apparent. 

The most extensive construction of mills has been in three states — 
North Carolina, South Carolina, and Georgia. Alabama has also 
had an important share in the progress, although not to the same 
extent as its eastern neighbors. 

The advantages usually specified as the reasons for the progress 
of cotton manufacturing in the South are: (1) proximity to the source 



PLANT LOCATION 41 

of supply of raw cotton, whereby the spinner is enabled (a) to save in 
freight rates on raw material, and (b) to take advantage of favorable 
market conditions; (2) water power; (3) lower taxation; and 
(4) cheap labor. To what extent has each of these alleged advantages 
affected the development ? How far are they still operative ? And 
in what degree are they offset by disadvantages? 

1. a) A saving in freight on raw materials is doubtless realized 
by some mills, but this economy is not so great as would at first sight 
appear. Where the mills have become so numerous that the local 
supply is insufficient to satisfy their demands, the price paid to the 
local merchants for cotton grown in the immediate neighborhood is 
equal to the cost of the cotton in other states plus the freight charges. 
Economy in freight on raw cotton is realized only by the mills in the 
more southern part of the cotton-manufacturing district, and prob- 
ably a majority of the southern spinners pay nearly as much as the 
New England spinners for their raw material. Furthermore, the 
cloth is generally shipped to the North. There are practically no 
bleaching, dyeing, or printing works in the South, as the water is not 
suitable. Hence if the cloth is to be finished it must go to the North, 
usually New England. And if it is to be exported in the gray it is 
generally shipped through New York, sometimes through Seattle. 
Since the market is in the northern states, it matters little, so far as 
freight charges are involved, whether the cotton is shipped before or 
after manufacturing. Until the South is able to obtain pure water for 
finishing and becomes commercially independent of New York by 
establishing its own export market, the saving of freight on raw cotton 
will be counterbalanced by the freight on the cloth. When that goal 
is reached, if at all, the growth of the industry may have forced all the 
manufacturers to obtain at least part of their cotton from distant 
states and thus nullify what slight advantage now accrues from 
proximity to the cotton fields. 

b) The proximity of the southern manufacturer to the source of 
supply of raw cotton does not enable him to gain any advantage of 
purchasing. The New York price rules and that quotation depends 
upon the state of the world's cotton market. There is not sufficient 
divergence in any locality to place local manufacturers in a superior 
position. In the second place, the majority of the southern manu- 
facturing companies have not as much ready money as the New 
England mills. It is available cash rather than geographical location 
which determines who will be able to buy cotton when the price falls. 



42 BUSINESS ADMINISTRATION 

2. The saving in cost of power is a more difficult point to decide 
upon. A number of mills are located on streams where they can 
use water power, and their charges for this element in the cost of manu- 
facturing are small. But the spot where water power can be secured 
may be remote from the railway and may involve other sacrifices. 
Moreover, less than one-fourth of the power for southern cotton mills 
is furnished by water. For those using steam the cost of coal varies, 
being cheap in Tennessee where there are local mines and dearer in 
other states, according to the distance it must be transported. While 
cheap power has encouraged the inception of some of these cotton- 
manufacturing enterprises, it has not been general enough to be con- 
sidered the paramount factor in the whole movement. 

3. Southern municipalities have frequently exempted the mills 
from taxation for a period of years as an inducement to location 
within their borders, and the rates are generally lower than in the 
North. But the southern mill owners, in contrast with those of New 
England, have had to provide sanitary improvements, and to subsidize 
schools, churches, and other public institutions in their villages. 

To offset whatever gains may have accrued to the southern 
manufacturers from the minor advantages already mentioned, the 
dispersion of the mills must be reckoned with. The factories are 
scattered throughout the Piedmont district, from Greensboro in the 
North to Atlanta in the South, and also here and there in the lowlands. 
Charlotte, North Carolina, is the commercial center for a large part 
of this district, but there is no considerable localization. The cotton 
industry, however, like many others, is naturally gregarious, and 
thrives best where the labor market is fairly steady and where repair 
shops are close at hand. This source of economy is realized in New 
England but not in the South. Yet this inconvenience will prob- 
ably disappear along with other advantages and disadvantages, as 
the industry emerges from the period of transition. 

4. Although these advantages have aided mill-building in the 
South the corner stone of the structure has been the supply of cheap 
and tractable labor. 

The lower wages, nevertheless, have been partially counter- 
balanced by the lack of skill and the fickleness of the workers. They 
had to be taught how to manage the machines, and while they have 
learned readily, they are even now inferior artisans to those New 
England operatives who have worked in cotton mills for a longer time. 



PLANT LOCATION 43 

The efficiency of the southern operatives has also been impaired by 
their inconstant attendance. 

Although the wages and probably the labor cost have been lower 
in the South, at present they have risen almost to the level of New 
England. The growth of the industry has taken away the advantage 
which was its chief asset. The stratum of cheap labor has been 
exhausted and in the boom of 1905-7 employers bid against each other 
so that wages were raised nearly one-fourth. 

The management of southern mills has generally been inferior to 
that of the northern factories. It has been less systematic and less 
economical. The superintendence has been less careful and the cost- 
keeping less accurate. The managers have been for the most part 
trained in southern mills, and the overseers are commonly southern- 
born and have gained their experience in the mills of that section. In 
the early years a few of the overseers and managers were northern men 
who had been sent to erect machinery in the South, but not many such 
are to be found at the present time. Besides their laxity in manage- 
ment the southern manufacturers have not taken care to keep up the 
quality of their product with the foresight that is characteristic in 
New England. Southern goods bring a slightly lower price than 
northern cloths, not only because of inferior workmanship, but also 
because they are less trustworthy. Since the southern manufac- 
turer is more likely to use poorer cotton or economize in some 
other way rather than incur a temporary loss, the reputation of 
his cloth suffers. There are numerous exceptions, however, and the 
general tendency is toward better management and maintenance of 
quality. 

The capital for building the earlier mills was obtained in the South 
itself. They were small establishments and represented the savings of 
local business men and farmers. Frequently the mill-building was 
short-sighted, local pride and the infectious spirit of the moment 
blinding the promoters to the inadvisability of investment in the 
manner pursued. Such mills have frequently failed and passed 
through numerous reorganizations. The speculative mama intro- 
duced an element of unsteadiness, but this, as in other industries, was 
an incident of early growth and on the whole contributed to the estab- 
lishment of the new business in the South. 

Once the profitableness of cotton manufacturing in this section had 
been proven, capital flowed in from the North, in part from bona fide 



44 



BUSINESS ADMINISTRATION 



investors and in part from other sources. Of the latter, the machinery 
manufacturers were heavy contributors. They took shares in the 
company's stock in payment for machinery, just as the English 
machinery firms have done during the recent period of rapid erection 

NUMBER OF COTTON SPINDLES, BY COUNTIES, 1913 




I I None reported 

Less than 50,000 spindles 
60,000 to 100,000 spindles 

ggggggg 100,000 to 200,000 spindles 
200,000 to 500,000 spindles 
500,000 spindles and over 



This map shows at a glance the concentration of the cotton-spinning industry 
in this country. The amount of such spinning done in the western half of the 
country is negligible. 



of mills in Lancashire. The machinery companies, in both countries, 
unloaded the stock at their earliest opportunity. 

Stock in southern mill companies has also been taken by business 
firms which have held the stock but with the object not so much of 
securing interest on the investment as of obtaining remunerative 



PLANT LOCATION 45 

privileges. These firms were New York commission houses which 
purchased stock on condition that they be granted the agency for the 
product. These financiers, however, more commonly helped to supply 
ready money by making advances on the goods with a Hen on the 
cotton as security, instead of accepting shares of stock. 

Several mills have been built on southern soil by New England 
companies, with a view to profitable investment and because of 
apprehension that the industry was to shift away from the North. 

To summarize the present situation: The advantages accruing to 
the southern manufacturers from proximity to the cotton fields, 
good water power, light taxes, long hours, and new machinery are 
counterbalanced in the North by more abundant capital and credit 
facilities, greater public conveniences, more experienced managers and 
better disciplined workmen, concentration instead of dispersion, 
superior climate, and nearness to markets and finishing works. The 
chief asset of the southern manufacturers has been the supply of 
cheap labor, but this source is nearly exhausted. Hence a rise in 
wages has taken place, and it is to be expected that by the competition 
of employers they will be forced up to the New England level. Few 
more native whites are to be secured; the negroes are unavailable ; and 
immigrants cannot be attracted by low earnings. 

6. LOCAL CONCENTRATION OF CERTAIN 
INDUSTRIES 1 

The following table brings out the most conspicuous instances of 
concentration. In each industry named in this table a single state 
in 1909 contributed more than two-fifths of the total value of products: 

Per Cent of Total 
t„a.,^„t Cf„*~ Value of Products 

Industr y State for United States 

1909 

Collars and curls New York 92.3 

Grindstones Ohio : . 88.8 

Artificial flowers and feathers and plumes New York 88 . 2 

Peanuts, grading, roasting, cleaning, and shelling Virginia 81 . 5 

Plated ware (not including silversmithing and 

silverware) Connecticut 77.4 

Fur goods New York 73 . 8 

Clothing, women's New York 70 . 8 

Hair work New York 70 . 1 

Liquors, vinous California 68 . 1 

1 Adapted from Thirteenth Census of the United States, VIII (1913), 127-28. 



46 BUSINESS ADMINISTRATION 

Pens, fountain, stylographic, and gold New York 67 .9 

Needles, pins, and hooks and eyes Connecticut 63 . 3 

Gloves and mittens, leather New York 60 . 7 

Millinery and lace goods New York 60 . 7 

Pipes, tobacco New York 60 . 5 

Firearms and ammunition Connecticut 58.6 

Rice, cleaning and polishing Louisiana 56.0 

Clocks Connecticut 55.7 

Coke Pennsylvania 54 . 1 

Iron and steel, steel works and rolling mills Pennsylvania 50 . 8 

Turpentine and rosin ■ Florida 47.2 

Furnishing goods, men's (not including collars 

and cuffs nor suspenders, garters, and elastic 

woven goods) New York 46 . 9 

Clothing, men's, including shirts New York 46 . 8 

Boots and shoes, including cut stock and findings . Massachusetts .... 46 . 1 

Ink, printing New York 45.8 

Brass and bronze products Connecticut 44 . 6 

Iron and steel, blast furnaces Pennsylvania 43 . 1 

It would require very extended discussion to determine for each 
industry the reason for the concentration in the states or cities 
named. Moreover, such a discussion would involve a great deal more 
of mere speculation, as the reasons for local concentration are often 
exceedingly obscure. It is necessary for the most part to confine 
the discussion to statements of a general character. 

There are certain advantages which particular states or cities 
have with reference to manufacturing industries in general and which 
tend to give them prominence in manufactures as a whole. Among 
these advantages may be mentioned: (1) water power, (2) convenient 
transportation facilities, (3) large amounts of capital available for 
investment in manufactures, and (4) a large supply of labor adapted 
to manufacturing enterprises in general. Besides these broad factors 
which affect the geographic distribution of manufactures in general, 
there are others which tend to bring about a local concentration of 
particular classes of manufacturing industries. Among the principal 
factors of this class may be mentioned: (1) proximity to the source of 
the required materials, (2) proximity to the market for the specified 
products, (3) a supply of labor peculiarly adapted to the industry, 
(4) the momentum of an early start which is usually closely related to 
the labor supply, (5) the habit of industrial imitation. Moreover, 
some of the general factors above mentioned set more powerfully in the 



PLANT LOCATION 47 

case of certain industries than in the case of others. For example, 
water power is obviously more important in the case of those industries 
which require large quantities of power than in the case of those which 
require little power, and transportation facilities are more important 
with reference to heavy products than with reference to those of 
little weight in proportion to their value. 

In some cases two or more factors co-operate in rendering a par- 
ticular locality peculiarly favorable to the development of a given 
industry. Again, one or two factors may be so strong as to prevail 
in spite of the lack of favorable conditions in other respects; and part 
of the establishments in an industry may be concentrated in one local- 
ity or group of localities by reason of one set of advantages and part 
concentrated elsewhere by reason of a quite different set of advantages. 
For example, proximity to the market and the momentum of an 
early start may result in the concentration of an industry in a locality 
by no means convenient to the source of supply of raw materials. 
This is conspicuously illustrated by the manufacture of cotton goods. 

In the case of those industries which are dependent upon materials 
produced largely throughout the country, the need of proximity to 
materials may result in a wide distribution rather than a local concen- 
tration of the industry. For example, the production of lumber is 
not locally concentrated in any marked degree. The lumber mills 
are in general situated in or near the forests, and the latter in turn are 
more or less generally scattered throughout the country. For similar 
reasons the flour-mill and gristmill industries are widely distributed. 
It is only where the production of the required materials is confined 
to more or less limited areas that the need of proximity to materials 
can bring about local concentration of a manufacturing industry. 



48 



BUSINESS ADMINISTRATION 

THE LOCATION OF THE MANUFACTURING 
INDUSTRIES OF THE UNITED STATES 1 




How do you account for the concentration indicated by this map? 
Does the outline on page 15 help you ? 



PLANT LOCATION 



49 



8. ILLUSTRATIONS OF CONCENTRATION AND 
DISPERSION 1 




\ / •* oo,. r — -\ \r ihs^y t 

\ S h 1 ° S 9 V o_J.^~ 5 

m ? h±-~7 ,?-*■ — y n.c. ^ 



"— < 



/ 



"■ M£X. 



**— LT- 



• $3,000,000 

9 $2,250,000 to $3,000,000 

9 11,500,000 to 12,250,000 

O $750,000 to $1,500,000 

O Less than $750,000 



N/ 




i. Value of Automobile Products by States, 1909 
How do you account for the concentration indicated by this map ? 




9 $3,000,000 to $4,000,000 
* $2,000,000 to $3,000,000 
$1,000,000 to $2,000,000 
Less than $1,000,000 



2. Value of Lumber Products by States, 1909 
How do you explain the dispersion shown by this map ? 



Taken from Thirteenth Census of the United States, X (1913), 405, 492, 810. 



5° 



BUSINESS ADMINISTRATION 




3. Value of Products of Merchant Flour Mills and Grist Mills by 

States, 1909 

How do you explain the dispersion shown by this map ? 



9. THE SEATS OF GREAT COMMERCIAL ENTERPRISES 1 

[This selection marks the transition from the discussion of the 
location of manufacturing industries to that of the location of com- 
mercial and financial industries. The student should still keep in 
mind the outline of relationships sketched on page 15. Is it still 
applicable ?] 

The place of transportation in making commercial cities. — Some 
advantage in transportation is the most fundamental and most 
important of the causes determining the location of the distributing 
center. It may almost be said to be the only cause for the formation 
of such centers. For some reason or reasons, a particular place is 
more conveniently and cheaply reached by many people than any 
surrounding point; and as a result, they naturally exchange com- 
modities there. The country store is located at the crossing of roads. 
There also is the village. In a mountain pass, or a gap that is a 
thoroughfare between two valleys is another favorable location. If 

1 Adapted by permission from J. R. Smith, Industrial and Commercial 
Geography, pp. 840-75. (Copyrighted by Henry Holt and Company, 1913.) 



PLANT LOCATION 51 

rivers are difficult to cross, settlements will spring up at the safest 
ferries or fords. In a level plain, a town will be near its center, 
and a focus of roads or railroads in such a plain, fertile and populous, 
will also surely make a city. 

The head of navigation on a river is a location far more command- 
ing than any of those already mentioned. Here all the trade that 
goes by the river must be changed from one method of conveyance 
to another. Here goods are collected from the surrounding country 
for shipment by water. Here people bring the goods and buy their 
supplies. Here also must be merchants, forwarding agents, and the 
repairers of wagons and ships. A town or even a city arises. It is 
interesting to note that towns of this class were relatively much 
more important in 1800 than in 1900. In the first-named year a 
river offered a much greater relative advantage for cheap transpor- 
tation. In 1900 the new means of transportation, namely, the 
railroad, had built up prosperous cities where under the old conditions 
cities were impossible. 

The railroad train has rushed past the river port to the seaport, 
and the giant ocean steamer has taken the trade. The most com- 
manding location for the commercial city is the safe harbor which is, 
or may become, the natural outlet for a rich and populous territory. 
The great seaport exists because it is a place for the breaking of 
cargo of ocean ships, just as the country store exists because the 
boxes and wagon loads of miscellaneous supplies must there be 
divided up into numerous small packages for the individual consumer. 
It must be a point as far inland as possible so that the importer and 
exporter may have the largest advantage of the cheaper freights 
possible on large ships. Therefore the greater ports are at the heads 
of bays and gulfs rather than on peninsulas and headlands. 

Besides easy access from the sea, the great seaport, the inter- 
national trade center, must have easy access to the land and to the 
centers of population that it serves. This access is best supplied 
by a river valley with the water transportation on the river itself 
and canals and railroads that can be built most easily along water- 
courses. Nearly all important seaports are at, or near, the mouths 
of rivers, navigable or otherwise, and, in regions having navigable 
rivers, the largest cities are in locations having the best communi- 
cation with the interior. 

Ports for raw materials and for manufactured goods. — One of the 
changes in the world-commerce of the past century has been the 



52 BUSINESS ADMINISTRATION 

pronounced separation of ports into classes. One class is the raw- 
material port, and another is the manufactured-goods port. The 
two are steadily growing more distinct at the present time. 

The filling of the channels of trade with the many bulky, cheap, 
or perishable articles has produced new trade conditions with less 
dependence upon great ports and distributing centers. Cheap and 
bulky goods usually go to the best advantage in full cargo lots; and, 
as the vessel has to depend upon no other freight, it can load at any 
small port near the place of production. It is easy and profitable 
for a vessel to go to a small port of Florida or Georgia for a full cargo 
of phosphate or lumber, to a Chilean outport for nitrate of soda, 
to a West Indian outport for iron or bananas, to Cardiff, Wales, for 
coke, or to a convenient railway terminus in the Argentine Republic 
for wheat. These goods may also be imported by a small port for 
use in local industries that do not require a large population for the 
manufacture and distribution of the products. A railway, a pier, 
and a suitable warehouse may enable a small town to export or 
import raw material in bulk. The raw-material port therefore may 
be, and often is, a small port. 

In contrast to this, only a large city can import or export cargoes 
of highly manufactured goods. These articles are consumed in small 
quantities. Much choice is exercised in their selection and purchase 
by the consumer. The retail dealer must exercise similar care and 
discretion in the selection of his stock. He can do this best in a great 
wholesale market where he can go from place to place and take 
advantage of the competition and variety of stock of many wholesale 
merchants. This is to be found only in a great city. This gives 
the city holding the trade conservative force that comes of its being 
known as a market. The trade in manufactured goods therefore 
continues to cling to the older distributing centers and devious 
routings long after it is possible to make direct shipments. 

The natural trade of an entrepot. — One commercial center can 
at times distribute a certain product or products to most of the 
trading world and, for those products at least, it becomes a world- 
entrepot. The commodities that lend themselves to this method of 
distribution must have special qualifications. The goods must have 
high value, small bulk, and good keeping quality. By having high 
value the freight rate is relatively insignificant and the long and 
devious journeys are not a serious handicap. Having small bulk 
there is not the demand for a whole shipload of them in any one 



PLANT LOCATION 53 

place, and so it is really cheaper to let them wend their way to trans- 
shipments through the common distributing center or entrepot. A 
second factor of influence is the question of distance. The more 
remote the origin and destinations of the traffic the stronger is the 
hold upon this trade of the entrepot with its organization of routes, 
ready to serve and hard to duplicate. The trade that best answers to 
this description and is therefore best fitted to be handled through 
an entrepot is that from the Orient to the Western world. The 
shifting of this trade from route to route and from center to center 
is an interesting study of commerce as affected by war, politics, 
discovery, invention, geographic control, and the economic conditions 
that resulted from these forces. Owing to this complexity of shifting 
forces the profits and glory of being the Western entrepot of Eastern 
trade have rested in turn with Venice, Lisbon, Bruges, Antwerp 
Amsterdam, and London. 

Causes of decline of world-entrepot. — Two reasons will largely 
explain the passing of the world-entrepot. First, the tremendous 
increase in the bulk of world-commerce. The second grows out of 
the first and is the multiplication of steamship and railway lines 
which enables many cities to serve as entrepots for limited areas. 

It must be kept in mind that decentralization does not destroy 
the old trade center. The statements concerning declining impor- 
tance are relative, applying to percentage of rapidly growing wholes, 
and not in any way to absolute quantities. 

The buying and selling of distant commodities. — A city may be 
a commercial center in two ways — first, as an actual distributer of 
goods; second, as a transaction center. The transactions in C often 
relate to goods in A to be sent directly to B. The transaction center 
is the lineal descendant of the eighteenth-century distributing center. 
In the days when the communication of ideas and the carriage of 
goods depended upon the slow and uncertain sailing vessel, or the 
equally slow and uncertain means of land conveyance, it was usually 
necessary to have the goods on the spot before they could be the 
subject of bargain or sale. However, the steamship, the railway 
train, and the telegraph have made a commercial world, new in its 
methods of management as well as in its staple commodities. The 
telegraph gives instant and constant information concerning stocks 
on hand, the crop prospects, and other conditions that affect the 
prospective supply. The steamship gives quick delivery; and, what 
is of equal importance, it far exceeds the sailing vessel in the certainty 



54 BUSINESS ADMINISTRATION 

of reaching port in a stated time. Commercial transactions of today 
may thus concern commodities in distant places and for future dates; 
and, although the movement of the goods may be decentralized, it 
still remains advantageous for the men doing this work to assemble 
in groups at some convenient center. 

Centers for management of trade. — These transactions are cen- 
tralized in the commercial metropolis. Decentralization of com- 
modity traffic has been an accompaniment of the growth of the new 
commerce; but the telephone, the telegraph, and the fast mail have 
helped to keep up the transaction center by putting the selling agent 
in easy communication with the factories and local centers of the 
producing and consuming districts in all parts of the world. Sales 
for the foreign trade or to the distant consumer cannot be easily 
arranged from cement works located in the Alleghany Mountains 
of Pennsylvania or Virginia, from the Georgia cotton mills, or from 
the phosphate mines of Tennessee or Florida. Consequently the 
selling agencies are in New York. 

The transactions of the wider international trade are also cen- 
tralized. London, the last great international distributer, is still a 
large international seller. With the new conveniences of telegraph 
and cable the London distributing merchant often found that, upon 
the founding of direct communications between foreign countries, 
he could continue to hold the business, although the goods no longer 
passed through London. He knew the conditions of both Eastern 
and Western markets, and the direct connections that have sprung 
up merely enabled him to deliver more quickly by shipping his goods 
direct. By this process, London has come to be a dealer in goods which 

may never at any time be within 5,000 miles of England 

For example, London brokers and London merchants recently had a 
practical monopoly of the international sales of pepper, Manila hemp, 
Indian jute, and Burma rice (the chief supply for the world-market). 
The world's supply of each of these four commodities is produced in a 
comparatively small region and consumed all over the world. The 
high value and limited supply of the annual crop would probably 
lead to disturbing price fluctuations if the central London firms did 
not act as a sort of regulator. Being in constant communication 
with their numerous agents in the centers of production and con- 
sumption, having a world-knowledge of this particular trade, they 
are able to conduct business more safely than the firm in New York 



PLANT LOCATION 55 

or Marseilles, should it attempt to buy hemp, jute, or pepper directly 
from the dealer in the point of shipment. 

The influence of capital. — The international transaction center 
requires a central location, a line of business that is carried on in 
widely separated places, and, in addition, an abundance of capital. 
Capital must be more plentiful in the center than in the commercial 
outposts, for the central management" of distant business operation 
is only possible by the use of capital from the controlling center. 

As the trading countries come to possess more adequate supplies 
of capital for their own use, and when the trade assumes larger 
proportions, the international transaction center loses, at least pro- 
portionally. When the buyer and the seller can manage a transaction 
without mortgaging the goods in transit to a financier in a third 
country, there is less need of the services of the broker in the inter- 
national transaction center. There is accordingly a tendency toward 
decentralization of management as well as a decentralization in the 
actual handling of goods. But the two decentralizations do not 
accompany each other. The direct movement of goods preceded in 
point of time the direct management of the business. The latter 
may be indefinitely delayed. The supplies of capital may remain 
low, causing dependence upon foreign bankers. Few countries have 
or promise in decades to have sufficient capital for their own needs. 
Since the commercial character of the traders in some countries is 
not reliable, no one dares trade with them who is not fully acquainted 
with them — which usually means having an agent on the spot. The 
trade of some countries will therefore continue to be largely transacted 
through the centers in the financial countries, although many products 
(usually the raw materials) go directly to the ports nearest the points 
of consumption. 

The rise of international bargain centers in the United Stales. — The 
United States will join Western Europe in capitalizing the world's 
new enterprises and the financial centers of these countries will be 
the centers of control of industries in the other continents. As the 
continent gains relatively on England, Hamburg, Amsterdam, and 
Paris will continue to rise in importance, while New York promises 
to take a leading position. This is well shown by the present domi- 
nance of that city in the industries of America. There is the head- 
quarters of the United States Steel Corporation, a veritable kingdom 
of riches in numbers of persons dependent upon it, and in the scope 



50 BUSINESS ADMINISTRATION 

of territory owned and covered, for its engines throb and its machinery 
roars in the states that border Canada and the Gulf, the Pacific and 
the cold New England Atlantic. In New York are consummated 
the deals in Montana and Arizona copper, Oklahoma oil, Maine 
spruce lands, Georgia pine lands, Susquehanna water-power plants, 
Virginia railways, Florida phosphates, West Virginia coal, Pennsyl- 
vania cement works, and the chartering of ships for Galveston cotton. 
Most of the railroads of the country have offices there, and those 
who supply them must also have offices there. The list might be 
drawn out indefinitely, for there is not a state or territory in the 
Union that does not have lands, enterprises, and resources managed 
from New York, the bargain center of the American people. 

10. THE LOCATION OF THE WHOLESALE 
DRY GOODS TRADE 1 

[This selection may well be read with the mind reaching back to 
the commercial location factors sketched in Selection 9 and at the 
same time reflecting upon factors making for change in location.] 

An approximate idea of the situation in the trade may be gathered 
from an analysis of some of the directories of the trade which are 
accepted as being of sufficient fulness to be useful. 

As for the general dry-goods jobbing trade, we find that there were 
in operation in 191 2 thirty concerns, only two of which were located 
in New York City, the former general dry-goods jobbing capital of the 
country. Chicago in volume of business is now the leader although 
there are only three concerns in Chicago which belong to this 
class. St. Louis comes next in order in volume of business, with five 
houses which clearly belong with this group. In addition to these 
two chief centers of general dry-goods jobbing, there are such cities 
as Kansas City and St. Joseph, Cincinnati, Louisville, Indianapolis, 
and Pittsburg, in which are located practically all of the remaining 
general dry-goods jobbers. Generally speaking, it may be said that 
practically all of the general jobbers now left are located in the 
Mississippi Valley, with only a very few in the Middle Atlantic states, 
and none at all elsewhere. 

Of the specialty jobbing houses, selling woolen goods among other 
lines, the directory gives us a total of 180, 98 of which are located in 

Adapted by permission from P. T.. Cherington, The Wool Industry, 
pp. 142-48. (A. W. Shaw Company, 1916.) 



PLANT LOCATION 57 

New York, and 38 more within a radius of two hundred miles of New 
York City. The remaining 44 are located mainly in the Upper 
Mississippi Valley, western New York, western Pennsylvania, and 
Eastern Ohio. The growth of ready-to-wear lines and the develop- 
ment of knit underwear have been two of the most important influ- 
ences bringing about the growth of a specialty jobbing business. The 
history of one after another of the most successful of the specialty 
jobbers shows that the start was as an offshoot from an old general 
dry-goods jobbing house, building up a business with a line of knit 
underwear as a nucleus for trade. In this way, line after line of the 
general trade has been split away from the old general dry-goods 
jobbing type of organization, and the lines which have been left 
naturally gravitated into the hands of specialized houses. 

The local general jobber is the third general arbitrary classification 
chosen. It is difficult to draw a sharp line between the more impor- 
tant of these and the smaller general dry-goods jobbing in the first 
group. Taking the general nature of their available market, however, 
and the approximate geographic extent of their trade as the principal 
basis for division between these two groups, we find 75 houses which 
may be classed as local general jobbing houses. Of these, 49 are in the 
upper Mississippi Valley, at such railway centers as Columbus, Ohio, 
and in the central South, at such points as New Orleans, Memphis, 
and Birmingham, and on the Pacific Coast, notably in San Francisco. 
One curious feature of the distribution of these houses is that in the 
area easily accessible to New York, this type of house scarcely exists 
at all, the main exception being in the outer edge of this region in 
such districts as western New York or northern Virginia. 

The fourth group, designated as small local jobbing houses, is 
distinguished from the group of local general jobbers mainly because 
their market area is smaller, and their total volume of business less. 
The matter of location has also been a factor in classifying houses 
in this group — those located at the minor railroad centers generally 
being placed here rather than in the local general jobbing-house group. 
The small local jobbers who include woolens among their lines number 
205. Of these, 64 are located in the southeast and in the Virginia and 
North Carolina section, and 65 in the central South and in the South- 
west, thus making 119 located in the southern district, or about 
63 per cent of the total number. The remaining houses of this kind 
are scattered through every section of the country. While they are 
not as numerous in the districts easy of access to the large jobbing 
centers, they figure everywhere as an important feature of the trade. 



58 BUSINESS ADMINISTRATION 

There are a few catalog jobbing houses which have come, within 
the last few years, to figure conspicuously in the dry-goods trade, 
although most of them have come into the dry-goods business rather 
incidentally, and not as a part of their original plan. Butler Brothers, 
of Chicago, The Baltimore Bargain House, of Baltimore, and Charles B. 
Rouse of New York all conduct a certain amount of dry-goods business 
in this way, and perform what many country dealers have come to 
feel is a valuable service in offering to them at least staple lines on 
a mail-order basis. 

Within the last few years there has grown up, in the Middle West 
particularly, a new type of wholesale house, dealing mainly in fabrics 
and known as a "drop shipper." This type of house possesses no 
warehouse facilities, and is really an order-taker. It works mainly 
among the medium-sized department stores. The method of opera- 
tion it employs is to solicit orders from samples and then to have these 
orders in carload lots sent to some convenient distributing point at 
the carload net rate, there breaking the car into smaller lots and 
securing a minimum freight cost from the factory to the store. It 
also cuts down all storage charges, reduces handling charges; and 
by offering comparatively full lines is frequently able to give better 
than regular wholesalers' prices to stores able to buy in case lots. 

These changes in the organization of the wholesale dry-goods 
trade clearly cannot be attributed to any one simple cause. Under- 
lying the whole process of reorganization are such large phenomena as 
the opening of the West, the drift of population westward, and the 
betterment of transportation facilities. Neither the changes within 
the wholesale trade nor those which have been mentioned as supple- 
mentary to them, such as the growth of large-scale retailers and the 
development of the ready-to-wear clothing industry, can be adequately 
explained without a consideration of these larger and perhaps more 
remote causes. 



ii. 



LONDON AND NEW YORK AS FINANCIAL CENTERS 1 



In considering the possibility of New York being a successful 
rival for supremacy as the exchange and financial center of the world, 
we can do no better than review some of the principal reasons why 
London has hitherto held that position, and it will be realized that 

1 Adapted by permission from E. L. S. Patterson, "London and New York as 
Financial Centers," Annals of the American Academy of Political and Social 
Science, LXVIII (1916), 264-77. 



PLANT LOCATION 59 

New York must duplicate these conditions in great part if not in 
entirety before London can be dethroned. These reasons and con- 
ditions can be tabulated briefly under three headings, physical, 
psychological, and economic. 

1. Physical conditions favorable to London. — London is situated on 
the threshold of Europe in the heart of the world's commercial 
activities, directly opposite the estuary of the Scheldt and nearly 
opposite that of the Rhine and is within a short distance of every 
important exchange center in the world with the exception of New 
York. 

London has the advantage of ice- and fog-free water lanes to 
every large port in the world with the exception of New York; the 
climate is equable and liquid, and perishable goods run little or no 
danger of freezing in winter. 

The restricted insular area of Great Britain, a little larger than 
the state of Minnesota, is also an important factor, as it not only 
affords an immense seaboard compared with its size, but concentrates 
the population. A frequent and rapid transit service makes Great 
Britain practically one large city with London as the business center. 
Every bank in the country has a branch or correspondent in London, 
carries its reserves there and clears direct with every part of the 
country through its London agent. The economy of resources 
effected by this natural concentration of funds is seldom realized 
and is worthy of study. This insular position of London renders it 
comparatively free from the danger of invasion and seizure by a 
hostile power, and this immunity has been a factor in making London 
a world-depository. 

The geographical situation of Great Britain, coupled with her 
willingness to invest money in international utilities, has placed her in 
a unique position as regards mail and cable facilities. Through her 
immense mercantile navy London has direct communication by fast 
steamers with every important port in the world and consequently 
acts as a foreign-mail clearing-house for all other countries. If 
French, German, or Dutch steamers afford a faster service to any 
point they can be utilized with little or no loss of time. 

As Great Britain owns and operates two-thirds of the submarine 
cable mileage of the world, it is natural that London should be a 
great cable center with practically direct communication the world 
over. This service is now supplemented by a far-flung system of 
wireless stations. Furthermore, under normal conditions, every main 



60 BUSINESS ADMINISTRATION 

railroad on the continent of Europe gives its best service and equip- 
ment to its London mail train. 

In dealing in foreign exchange and stocks London is the center 
of the world as regards time. She knows the conditions in Eastern 
markets before they close and is open long enough to operate in 
New York before her own markets close. Her position is therefore 
pivotal as regards time and distance. 

2. Psychological conditions. — Perhaps a better heading than this 
would have been national characteristics. Great Britain i? a land 
of slowly acquired fortunes, and the banker and merchant there are 
content with small profits and slow returns. They have long realized 
the fact that trade follows the loan and have therefore been willing 
to invest money in foreign countries with no prospect of recovering 
immediate returns or large profits, and the financing of these loans 
abroad has been an important factor in making the London money 
market so supreme. It is doubtful if the American is^ adapted tem- 
peramentally for operations of this kind or for the small profits of 
the exchange operations connected therewith. The United States 
has still a vast area in proportion to its population, its natural 
resources are not yet fully developed, and it is a country of large 
and rapidly acquired fortunes. It will, therefore, be many years 
before the investors and entrepreneurs are forced to direct their 
attention to foreign fields. 

London's supremacy is the cumulative result of numerous forces, 
political as well as economic, spread over a long series of years during 
which time the world has learned to think in terms of British money, 
and the bills of exchange on London have been raised almost to the 
dignity of an international currency, while the safety of the Bank 
of England and the value attached to the word "sterling" have 
become proverbial. Sovereigns and to a great extent Bank of 
England notes pass current the world over without recourse to 
money changers. The dollar and the dollar bill must be made equally 
well known and acceptable. 

It must not be overlooked that, when an international business 
is so long established and well centralized as the money market of 
London, the world will continue to use it as a matter of convenience 
irrespective of the possibly superior facilities of New York. The 
financial roads to London are well defined by much travel, and business 
tradition will favor the old stand; it is human nature the world over to 
follow the cow track across a pasture no matter how oblique its direction. 



PLANT LOCATION 6l 

3. Economic factors — The principal economic factors which tend 
to enhance London's position as a financial center may be considered 
under the following heads: Free Gold Market; Liquid Discount 
Market; Stability of Money Rates; Immense Mercantile Navy, 
Great Foreign Export and Import Trade; Tariff; Excellent Banking 
System at Home and Abroad; the Numerous Branches of Foreign 
and Colonial Banks Established in London; Freedom from Panics and 
Financial Disturbances; Free Navigation Laws; Marine Insurance, 
etc. ; and reliable Ship Registration. 

Great Britain adopted the gold standard unequivocally in 1816, 
over one hundred years ago, and has not departed from it since, even 
to the extent of charging a fractional premium on gold or by restricting 
its export by legal or sentimental embargoes. 

The national complement of a free gold market is a liquid money 
market capable of absorbing bills of exchange to an almost unlimited 
amount. This unique feature of the London market makes a first- 
class bill of exchange on London as acceptable as gold. The strength 
and broadness of the London market, apart from the natural resources 
of the country, lie in the ebb and flow of foreign capital through the 
machinery of the branches of foreign and colonial banks established 
there. 

The absence of a tariff in Great Britain except on a few specific 
articles is of great importance, as merchants and others import into 
Great Britain free of duty and export again at their convenience. 
London and the other important seaports of Great Britain correspond 
to the freight yards at railway centers. Cargoes consisting of goods of 
every description pour into these ports from all parts of the world and 
are there sorted into mixed cargoes to be dispatched to various coun- 
tries. In other words London also acts as a clearing-house for cargoes. 

Large amounts of British capital have been invested in the 
establishment of British banks in her colonies and in foreign countries 
with head otfices in London, and these render invaluable assistance in 
the operation and preservation of British foreign trade and commerce. 

Great Britain possesses a mercantile navy second to none in the 
world. This not only means an immense toll on the world's commerce 
in the way of freight, etc., but also enables Great Britain to govern 
to a great extent the destination of cargoes. Incidentally, with her 
large ship-owning, Great Britain is naturally interested in marine in- 
surance, and owing to the excellent standing of her insurance com- 
panies does an immense business in foreign marine insurance. 



62 BUSINESS ADMINISTRATION 

British navigation and shipping laws are liberal. A foreign ship 
is in the same position as a British ship with regard to British trade, 
and foreign ships engaged in the coasting trade are not subjected to 
higher port rates than British ships. British law affords equitable 
protection to both British and foreign seamen, but avoids emasculat- 
ing the service by undue paternalism. 

We have now reviewed briefly the principal reasons to which 
London owes her financial supremacy and though the events of the 
past few years have brought New York into a position of financial 
eminence and power, it remains to be seen how much of this power 
has been thrust upon her temporarily and how much she has acquired 
permanently at the expense of London. 

B. Factors Determining Location in Sub-Areas — Site Location 

The preceding discussion has been directed toward answering 
the question: Within what broad area, or areas, may a given plant 
be appropriately located ? There still remains the determination of 
the proper site within such area. It will be found (see Selections 
12-13) that there is geographical specialization by small areas and 
that this may be explained by the same general principles which 
explain specialization in terms of broader territories. But even 
within these small areas a specific site must be chosen and we must 
consider (see Selections 13-16) the factors determining this choice. 
These matters lead very naturally to a discussion (see Selections 
17-19) of the relative merits of city, country, and suburb as locations 
for industrial plants. 

PROBLEMS 

1. "Eventually, in the largest cities, the subdivision of certain sections 
is highly developed. The distribution of different sections depends 
upon (1) topography; (2) prior establishments; (3) transportation; 
(4) effectiveness of the demand of different utilizations; (5) their 
relation to one another." Explain the significance of each item. 

2. "The financial section which is of marked importance only in the 
largest cities, is generally to be found at or near the starting-point, 
or the original center of gravity, and is hard to move." Explain. 

3. Why does the relative significance of corner lots vary with different 
industries? Can you lay down any general principles governing the 
matter ? 

4. Enumerate forces tending to group businesses in particular streets; 
tending to disperse businesses. What businesses in each case ? 

5. Do you know a city in which there is an "automobile row" ? Why is 
it located as it is ? What other industries are grouped near it ? 



PLANT LOCATION 63 

6. "The greater the number of passers-by, the greater is the value of 
a site for retail establishments." Is the statement strictly true or 
are there certain exceptions ? 

7. In a general way what classes of stores follow the growth of a city 
into its suburbs and what ones stay at its business center ? 

8. "Wholesale trade is likely to be centralized; retail trade is likely to 
be decentralized." Why or why not ? 

9. "Effective competition in retail trade sometimes requires concentration, 
sometimes dispersion of business." Explain. 

10. Draw up a statement of general principles with respect to the location 
of retail establishments. 

11. What is meant by saying that a factory site should be selected in 
terms of the proper routing of materials in manufacture? in terms 
of equipment to be used ? in terms of an appropriate type of building ? 

12. "The entire planning should be for an ultimate plant even if a dozen 
times the size of that to be immediately constructed, and land pur- 
chases should be made on that basis." Give reasons for and against. 

13. How much weight do you give to "salability " in locating a plant ? As 
much for a factory as for a retail store? Assume any given business 
and list as many factors as you can which will affect salability. 

14. What is meant by saying that it is desirable so to locate a plant as to 
secure advertising value ? 

15. "The city location has the advantage: first, for the manufacture of 
specialties depending upon fashion, of goods for immediate consump- 
tion, or requiring considerable supervision by the selling department 
over the manufacturing department, where nearness of market is 
necessitated by the nature of the product; second, when a special 
advertising and selling advantage will accrue to the sale in the city 
where the factory is situated; third, when skilled labor is required 
intermittently or in large quantities; fourth, where the product is 
shipped in less than carload lots." Explain what the writer has in 
the background of each of these statements. 

16. "If it were left to the selling organization to choose, there is no doubt 
that in ninety-nine cases out of a hundred the factory would be located 
in a large city." Why, or why not ? 

17. "A rigid and inflexible street system in a city handicaps a factory." How? 

18. "Adequate provision for schools, libraries, and civic institutions may 
be of business value to the suburban plant management." How? 

19. "The city location has always one advantage. The city is the battle- 
field of business." Is this worth much? 

20. Cite instances where low tax rates or freedom from taxation may 
result from causes which would put an unendurable burden on a busi- 
ness in other respects. In general terms when are low taxes a safe 
attraction ? 



64 BUSINESS ADMINISTRATION 

21. "Perhaps the greatest single factor in promoting the bad location of 
producing enterprises is local patriotism." Explain. 

22. If X lot will save a manufacturer $1,000 a year over Y lot because 
of its better facilities for handling, shipping, or storing goods, how 
much more can the manufacturer afford to pay for it ? 

23. "Mechanics of the highest skill or specialized training avoid the isolated 
plant for definite reasons." Give some of these "definite reasons." 

24. "In some cases the facilities for quick and economical construction 
are the crucial considerations." Why quick ? 

25. "A site in the city itself will generally be too costly for all but light 
manufacturing." Do you agree? 

26. What is the significance of settled and stable political conditions with 
respect to the location of industries ? 

27. Local ordinances need to be considered, particularly in large cities 
What matters are thus affected ? 

28. "The impulse toward cheap land, low taxes, and elbow-room are 
centrifugal forces throwing industries out from the large centers of 
population. Centripetal forces bind them as satellites beyond the 
outer rings of the mother city." What centripetal forces ? Give some 
examples of satellite cities. 

29. Is such an enterprise as Gary worth while as a means of escaping labor 
problems ? Give detailed reasons in support of your answer. 

30. Does the suburban or country location increase the social responsibility 
of the business manager ? How ? 

31. List the factors for and against country location (as opposed to city 
location) as regards (a) labor, (b) material, (c) markets, (d) social 
environment. 

32. "The smaller an establishment the more significant is the question of 
location to it. The large concern can be more self-contained." Do 
you agree ? 

33. Could a large bakery wisely be established in a small town ? At what 
general principle is the question directed ? 

34. Praw up an outline of the main points in this section. Does your 
outline show cases of the manager's relationship to the physical environ- 
ment ? to the social environment ? to risk-bearing ? to personnel ? to 
finance? to the market? to technology? Are there evidences of 
interdependence in these relationships ? 

12. GEOGRAPHICAL SPECIALIZATION BY SMALL AREAS 
AND THE SECTIONS OF CITIES 1 

Every city has a definite structure which, expanding more or less 
regularly along the lines of least resistance, is subject to modifications 
by external influences. The study of the ground plan of any city 

1 Adapted by permission from C. C. Evers, The Commercial Problem in Build- 
ings, pp. 17-22, 83-86. (The Record and Guide Company, 1914.) 



PLANT LOCATION 65 

will enable us to ascertain the lines of communication with the exte- 
rior, the main arteries of internal traffic, the subordinate streets, the 
distribution of the different sections, and their relation to one 
another. 

As cities grow, they become more complex and their subdivisions 
more numerous, and at the same time these assume more distinctive 
characteristics; numerous residential sections spring up, attracting 
people of different tastes. Business sections of established character 
tend to attract industries and occupations similar to those already 
located there and to repulse others. The addition of new territory 
disturbs the center of gravity and adds its influence to the other ele- 
ments impelling changes. 

The following list . comprises the most important sections 
and indicates their uses: residence — (1) highest class residential, 
(2) general residential sections, (3) tenements or cheapest dwellings; 
business — (4) financial and office section, (5) high-class shops (general 
shops and department stores), (6) other and local shopping centers, 
(7) wholesale and commission, (8) warehousing, (9) factories, etc. 

The financial section, which is of marked importance only in the 
largest cities, is generally to be found at or near the starting-point, or 
the original center of gravity, and is hard to move. 

The highest class residential sections are established on land of 
moderate elevation, free from nuisances such as the noisy traffic of 
street-car lines. They attract high-class shops which endeavor to 
be as near as possible to their customers; they also attract churches, 
theatres, clubs, and similar attendant buildings. 

The medium-class residential sections are also attracted by land 
of moderate elevation, but depend to a greater extent on good trans- 
portation, and to a lesser degree on absence of nuisances. They 
also cause the establishment of local shopping streets and create a 
demand for churches, theatres, clubs, etc., for the use of their 
occupants. 

The cheaper dwellings or tenements utilize land in proximity to 
factories, warehouses, and shops, which are often intermingled with 
buildings used as dwellings; others form dense settlements along 
transportation lines. Every improvement in transportation tends to 
strengthen these outlying settlements, whose inhabitants are willing 
to spend the extra time necessary to reach their employment and to 
pay the cost of the daily journey in return for cheaper rents and less 
crowded conditions. 



66 BUSINESS ADMINISTRATION 

Shops catering to local trade follow and press on the different 
residential sections, whilst those general shopping sections which serve 
a larger territory are dependent to a greater extent on transportation 
which is necessary to bring their customers to them and they tend to 
concentrate in central locations. The largest shopping sections create 
a demand for light manufacturing establishments, warehouses, and 
stables or garages in their immediate vicinity. 

Commission and wholesale houses, which draw their trade largely 
from the surrounding country and are only partially supported by 
local buyers, congregate in sections which are accessible to their cus- 
tomers and where they have proper transportation facilities for the 
delivery of their goods. 

The location of warehouses and factories is governed by the need 
for cheap land and access to transportation lines. 

The less desirable lands are frequently used for the storage of 
articles of large bulk, like coal, stone, brick, and lumber. 

The location of these different sections and the areas they cover 
is constantly shifting, some of them offering greater resistance to 
changes than others. There exists a constant tendency to the dis- 
placement of one class of utility by others which can pay higher rentals, 
especially when their presence is detrimental. For instance, the 
advent of shops in the high-class portions of Fifth Avenue, New York 
City, has caused the steady northward movement of Fifth Avenue 
residences, with which all New Yorkers are familiar. 

Distribution of different sections. — The distribution of different 
sections depends on: (i) topography; (2) prior establishment; 
(3) transportation; (4) effectiveness of the demand of different utiliza- 
tions; (5) their relation to one another. 

13. THE LOCATION OF RETAIL ESTABLISHMENTS 1 

The possibility of making sales depends upon accessibility to the 
purchasing public. The greater the number of people, other things 
being equal, who live near, who come to, or who pass by a certain 
location, the more valuable that location is. Every retailer who knows 
his business recognizes this. The president of the Woolworth iive- 
and ten-cent-stores company expressed this idea exactly when he 
said, "I set my traps where the mice are thickest." Store managers, 
particularly the managers of certain chain-store systems, on seeking 

1 Adapted by permission from P. H. Nystrom, Economics of Retailing, pp. 
138-53. (The Ronald Press Company, 1915.) 



PLANT LOCATION 67 

out new locations for stores, first determine the number of people who 
pass the proposed locations, actually counting them for certain periods 
of time often for weeks, so as to get accurate data and then give their 
preference for store location to those places — other things being 
equal — that show the highest counts. 

The neighborhood store aims to get as close to the homes of the 
prospective customers as possible, so that it will be easy for them to 
come to the store or to send for goods by means of children or servants, 
and so that deliveries can be made quickly. But neighborhood 
stores must as a rule content themselves with handling only such 
lines of goods as are of daily necessities in the surrounding homes, 
such as groceries, meats, baked goods, and dairy products. Another 
limitation on a neighborhood store that is clearly evident is that its 
area of trade is limited. Hardly ever does trade for such a store come 
further than four or five blocks. Beyond this radius the influence of 
competing neighborhood stores or the attraction of the stores in the 
center of the city overpower the trade possibilities of the neighbor- 
hood stores. 

In considering the value of a location for a retail store, however, 
something more than the number of passers-by must be taken into 
account. The purchasing power and the probable proportion of 
customers from the passing crowds are most important considerations. 
Hence in analyzing a location for a retail store, one must determine 
what economic classes are represented, to what extent in each, and 
what their buying habits are. ■ 

Another classification of passers-by that will prove helpful in 
determining an estimate of the possibilities of a location is based on 
the purpose or the reason for their passing by. Some are going to 
or coming from their place of work or business. Others are out for 
pleasure. Others are out to buy, while others are out merely to look. 

Passers-by going to or returning from work or business are, as a 
rule, not good customers for anything, with the one exception of the 
higher-salaried and income-receiving classes who patronize news- 
stands, bootblacks, barber-shops, cigar stores, and, to some extent, 
haberdasheries on their way to and from business. Large crowds of 
factory employees, men and women, may pass a store day after day 
for years on their way to and from work and never patronize it. On 
their way to work there is usually little time left before the whistle 
blows; hence there is usually little or no chance to look at goods. 
On their way from work they are usually tired and hungry and not in 



68 BUSINESS ADMINISTRATION 

the mood for shopping. Many factory workers, particularly of the 
younger generation, do not care to trade in a store or in a part of 
town where their occupation is known or where any reference may be 
made to their daily labor. The "downtown" retail district is much 
more likely to draw their trade. A very large part of the goods of all 
kinds needed by the family from which the factory worker comes is 
purchased by the wife or mother, and thus the trade goes to the 
locations that are the most convenient or attractive for her. The 
only classes of retail business that seem to do well on the custom of 
working people going to or coming from work are, too often, the 
saloons and the cheaper grade of restaurants and lunch counters. 

Pleasure seekers are usually better buyers than the army of 
workers passing to or from work. Refreshments, flowers, sweets, 
souvenirs, and trinkets are some of the objects that may appeal to 
their fancies. Such trade is strictly chance custom. It is entirely 
dependent upon the time of year, the occasion, and the weather. 

The people who come out for the express purpose of shopping and 
buying are for the majority of retail businesses by far the most 
important classes. The places to which these people go are the places 
that are valuable for retail purposes. Except for such necessities as 
common foods, meats, and so on, the place to buy, according to the 
opinion of the shoppers, is nearly always in the heart of the town. 
This may be the location of the village corner store, the big stores at 
the intersection of the principal streets in the city, or the place where 
the great public markets are located. Here, in the mind of the average 
customer, are offered the biggest variety, the best qualities, the best 
facilities for examination, and the biggest bargains. 

Stores tend to cluster around this best location in the city and to 
form what is known as the retail district. The stores established 
are not always competitors. Almost as frequently they arrange 
themselves into complementary groups co-operating with each other 
in the attraction of custom and in the making of sales. Thus, stores 
dealing in men's goods are sometimes found on one side of the street, 
while stores dealing in women's goods are located on the other side. 
Dry-goods, millinery, jewelry, shoe, and book stores are likely to be 
found close together, if not entirely absorbed under one roof, in the 
form of a department store. Grocery stores, meat markets, and 
bakeries tend to form another grouping, each co-operating in a way 
with the other kinds of stores in the group. Confectioneries, soda and 
ice-cream parlors, florists' shops, and theatres form another natural 



PLANT LOCATION 69 

grouping. The saloon, billiard hall, tobacco and news-stand, and the 
cheaper grade of restaurants form still another. 

But stores that sell exactly the same kind of goods and that are 
clearly competitive do not necessarily merely divide the business that 
was formerly done by one store. When there is known to be compe- 
tition, this in itself attracts trade, and people come from farther 
away. New wants are developed that did not exist before. Thus 
the result is an increase in the total amount of trade. Stores han- 
dling the same or similar lines and stores handling different lines of 
goods, all close together, save the customer's time. This is probably 
the greatest argument for the department store, which assembles 
many lines under one and the same roof. 

Most customers, particularly women, like to compare values in 
different stores before purchasing. An investigator for a large pub- 
lishing house has stated that " before she buys, a woman usually visits 
three stores to compare goods. The man, who is distinctly 'anti- 
shop' in his inclinations, on the contrary visits but one." Competing 
stores, located close together and dealing in goods women buy, permit 
comparisons to be made easily. A location next to a large, old, well- 
advertised, well-known, and popular store is always valuable for an- 
other store dealing either in complementary or competitive lines of 
goods. 

We have so far considered the possibilities of a retail store location 
from the standpoint of the number of passers-by, the buying power 
represented, and the purposes that bring them by. There is another 
factor having an influence on the value of a location and that is the 
buying habits of the possible customers. Not all people within even 
the same economic classes, or those having the same incomes, expend 
their money in the same way. In nothing is this more clearly exempli- 
fied than in lines commonly called luxuries. Some people spend their 
money freely for such items, while others with the same income 
do so sparingly. The average consumption of such commodities 
varies greatly from one community to another. In this connection 
it may be noted that tastes and habits are neither stationary nor 
permanent. 

Any influence on the course of people's movements affects the 
value of a retail location. Certain streets are more popular than 
others, and one side of the street is generally more traveled than the 
other, with a consequent difference in value for retail purposes. One 
must assume that there are definite reasons for this, and upon the 



70 BUSINESS ADMINISTRATION 

basis of these reasons the retailer must select his location or make the 
best use of the one already selected. 

Sunlight and temperature tend to make one side of the street 
more crowded than the other. In warm climates and in warm weather 
people seek the shady side. In colder climates and in the winter-time 
they walk the sunny sides. Which side of the street is most popular 
must depend therefore upon what time of the day shoppers come 
out in greatest numbers. 

The shady side of the street has an advantage. Because of the 
reflection of softer lights from the plate glass and show-window back- 
grounds on this side, the window displays appear to better advantage 
and therefore draw more attention. Also a greater variety of goods 
can be shown and much better effects can be obtained on the shady 
side of the street than on the sunny side because of less danger to the 
goods themselves from the effects of the sun. Goods of delicate 
shades generally fade easily and need protection from the sun's direct 
rays. In order to display such goods on the sunny side awnings are 
necessary, but awnings interfere with the widest and best use of the 
front of the building and windows, and hence may be considered in 
the light of necessary evils only. 

In some places there are generally prevailing winds that strike 
certain locations or one side of certain streets in a more disagreeable 
way than the other side, causing values to be less on the exposed side. 
Dusty and windy locations are never desirable if they can be avoided. 

If a town is built on a sidehill, the upper side of the street is 
nearly always preferable to the lower. The reason may be that the 
upper side gives a better view, or it may be that it is less laborious to 
go from the upper side to the lower side, if necessary to cross the 
street. Dust and refuse tend to gather on the lower side of the 
street, with the result that the upper side is generally cleaner. What- 
ever the cause, the fact remains that the upper side seems to be favored 
in most cases. This tendency may be remedied to a certain extent, 
but not entirely, by having the streets graded so as to put the walks on 
both sides on the same level. 

Often the only explanation for the value of a side of street for 
business purposes is popular habit. People continue to take one side 
rather than the other because sometime in the past they found it best 
to do so. After the reason for so doing passed away, the practice 
continued as a habit. 



PLANT LOCATION 



71 



See also p. 64. Geographical Specialization by Small Areas and 
the Sections of Cities, 
p. 319. Some Phases of Market Analysis. 



14. SITE LOCATION CONSIDERATIONS 1 

The beneficial or detrimental effects of surroundings or external 
conditions on different classes of buildings may be summarized as 
follows : 

Financial and office buildings. — Very great excess in value of corner 
over interior lots on account of permanent light, increased available 
accommodation, large frontage for advertising, and greater accessi- 
bility. 

Beneficial Detrimental 



Similar surroundings 

Ease of access from other sections of 

the city 
Accessibility to principal financial 

institutions, banks, exchanges, 

clearing houses, etc. 
Compactness 

Ease of intercommunication 
Absence of severe grades 



Poor or dissimilar surroundings 
Difficult access from other sections 
Distance from main financial insti- 
tutions 
Noise of elevated railroads 
Noisy or unpleasant factories or 
plants 



High-class general retail shops and department stores. — Great 
excess value of corner over interior lots, especially at the intersection 
of two or more traffic streets, mainly on account of the increased oppor- 
tunities for display and the intensity of passenger traffic on these 
streets; partly on account of better light; they attract loft buildings 
for light manufacturing or for finishing processes, which locate as near 
them as possible. 

Beneficial Detrimental 



Good frontage on traffic streets for 
display 

Good transportation facilities 

Continuity of display windows of 
other shops 

Nearness to the best residence sec- 
tions 



Frontage on non-traffic streets and 
too small area for proper display 
of goods 
Poor transportation facilities 
Nuisances, such as irregular build- 
ing fine, schools, vacant unim- 
proved lots, factories, stables 



1 Adapted by permission from C. C. Evers, The Commercial Problem in Build- 
ings, pp. 83-86, 259. (The Record and Guide Company, 1914.) 



72 



BUSINESS ADMINISTRATION 



Beneficial 

Good streets and sidewalks 
Absence of severe grades 
Good access from residential sections 
Sufficient area for proper showing of 

goods 
A rear or side street for the delivery 

of goods (in some cases, especially 

department stores) 



Detrimental 

Lack of continuity of shop fronts 
Poor access from residential sections 



Small local retail shops. — Corners more valuable than interior 
lots on account of increased opportunities for display and light; 
proportion depends largely on value of traffic on intersecting 
streets. 



Beneficial 

Proximity to customers, who gener- 
ally are those residing in vicinity 

Car line on street 

Good frontage for display more 
important than large area 

Maximum depth necessary, about 
fifty or sixty feet 

Continuity of shops, but not too 
long blocks; if blocks are too long 
they are weak at center and 
receive a smaller proportion of 
passenger traffic for a given 
frontage 

Good paving and sidewalks and 
clean streets 



Detrimental 

Inaccessibility to customers 
Frontage on non-traffic streets 
Lack of continuity 
Too long blocks, too long street 

crossings at corners 
Poor transportation facilities 
Bad paving and sidewalks and dirty 

streets 
Nuisances, such as factories, stables, 

etc. 



The best local shopping street is generally found to lie as nearly as 
possible through the center of the district which it serves; its strongest 
part will tend to be near the center of gravity of the section. 

Wholesale or commission buildings. — Corner lots do not greatly 
exceed interior lots in value. Sufficient floor area for displaying and 
storing goods more important than frontage. Goods generally 
advertised to a greater extent by commercial travelers than by street 
display. 



PLANT LOCATION 



73 



Beneficial 

Sufficient area for storage and dis- 
play of goods 

Ease of access 

Light (in some cases) 

Proximity to high-class retail stores 
when custom is with them 

Proximity to freight transportation 
facilities 

Location amidst similar utilities 

Good and level streets for hauling 



Detrimental 

Lack of sufficient area for display 
and offering of goods 

Distance from transportation facili- 
ties 

Poor street improvements and heavy 
grades, increasing cost of hauling 



Warehouses. — Corners of practically the same value as interior 
lots, except where light is needed for inspection of goods. Frontage 
on street of small importance compared to required area. Deep lots 
give cheaper rentals. 



Beneficial 

Nearness to steamship or railroad 

facilities 
Level and well-paved streets for 

hauling 



Detrimental 

Lack of transportation facilities 
Shallow lots 

Difficult access, heavy grades, and 
poorly paved streets 



Factories. — Coiners of same value as inside lots, except for light. 
Land of cheap value and nearness to transportation facilities chief 
requisites. For light manufacturing, proximity to large retail stores 
which they serve. 



A word should be said concerning the difference between corner 
lots and inside lots for various purposes. The greatest difference 
between inside and corner lots occurs in business property at the 
intersection of two traffic streets, or where property has its long 
frontage on a business street. The only satisfactory way to estimate 
the value of such plots is by capitalizing the net rents, less the interest 
return on the cost of the building. The following table shows, in 
terms of percentages, the approximate difference in value of corners 
over inside lots in different classes of property. 



74 



BUSINESS ADMINISTRATION 



Cheap 



Medium Class 



High Class 



Detached residence prop- 
erty 



Attached residence prop- 
erty 

Apartment houses 

Tenements 

Small shops and flats. . . . 

Stores and offices 

Financial buildings 

Wholesale and commission 
Warehouses and factories 



Any difference in value 
offset by the extra 
cost of street im- 
provements 

10 
15 to 20 
15 to 20 
20 to 25 



5 to 10 



20 to 30 
25 to 50 
25 to 30 
25 to 50 
40 to 50 



10 to 20 



10 to 50 
50 to IOO 
30 to 40 



10 to 15 
Little, if any, except in 
high factories, where 
it may be 10 to 20 



50 to 150 
50 to IOO 
15 to 20 



15. AN OUTLINE OF THE RELATIONS OF TRANSPORTA- 
TION TO SITE LOCATION 1 

[This material is presented not only because of its own subject- 
matter but also because it indicates a possible method of attack 
upon other phases of site location.] 

A. Transportation 

1. Railroads (freight problems) 

a) Quantitative requirements 

How important a matter is rail transport to you ? 

b) Qualitative requirements 

What type of service do you demand ? 

Is a private siding necessary ? 

In what directions must your goods travel and what roads are 

required for this ? 
Is your business large enough to make you independent of any 

one road or would it be best for you to secure a plant site 

which would give you a choice of lines ? 

c) What sections of the city would best meet your needs in this 

particular ? 

2. Railroads (passenger problems) 

a) Quantitative requirements 

b) Qualitive requirements 

What type of service is demanded ? 
In what direction is the greatest amount of travel ? 
Where are the passenger terminals which drain this territory 
located ? 

1 Adapted from an unpublished manuscript by F. M. Simons, Jr., Manager of 
Industrial Engineering Department, Arthur Andersen and Company. 



PLANT LOCATION 75 

3. Waterways 

a) Quantitative requirements 

How important a matter is water transportation to your industry ? 
What type of transportation is most important and to what 
degree — lake, river, canal ? 

b) Qualitative requirements 

What type of service is demanded ? 

In what direction must your water traffic flow ? 

What (and in each case specify, lake, river, canal) water facilities 

best meet your requirements and where are these facilities to 

be found ? 

c) What sections of the city best meet your requirements in 

this particular ? 

4. Electric 

a) Quantitative requirements 

How important a matter is this to your plant and why ? 

b) Qualitative requirements 

What type of service do you demand — surface, elevated, inter- 
urban ? 

From what parts of the metropolitan district (or surrounding 
territory) do you recruit your labor ? 

Is your industry such as to allow a wage sufficient to permit of 
carfare or must you seek the labor in its home ? 

What parts of the city best meet these requirements ? 

c) What sections of the city best meet your requirements in this 

particular ? 

B. Street communication 

1. Cartage and drayage 

(Study this in connection with your transportation problem. It may 
be that a wise selection of plant site would wipe out the cartage 
problem) 

a) Quantitative requirements 

How important a matter for your plant and why ? 

b) Qualitative requirements 

What type of service does your business demand ? For example, 
what weight and bulk of article must be handled and what is 
the effect of this on your problem ? 

How fragile or perishable are your raw materials or products ? 

What is the resultant effect ? 

c) What is the resultant of your cartage and drayage problem ? 

d) What sections of the city best meet your needs in this particular ? 

Paving and road conditions and street congestion problems 
confront you here 



76 BUSINESS ADMINISTRATION 

2. Street conditions affecting movement of persons; pavements — their 
condition and width. Consider this matter under headings indicated 
above, remembering that for a large plant this may be an important 
detail 

16. THE INTERDEPENDENCE OF CONSTRUCTION AND 
EQUIPMENT WITH SITE LOCATION 1 

The following is a classification of the work incident to the planning 

and building of industrial plants down to the time of definite site 

location. 

P = PRELIMINARY SERVICE 

P a Determination of specific manufacturing requirements and com- 
pilation of data relating to present and future needs. 

P b Determination of fundamental principles that will be followed in 
new plant regarding the administration of all manufacturing 
details. 

P c Consideration of features exemplified by plants recently built for 
essentially the same class of work. 

P d Determination of kind and amount of machinery that should be 
provided for immediately. 

P e Determination of geographical location of site and whether plant 
should be built in business center or suburban section. 

P / Determination of approximate arrangement of equipment and 
processes based upon elemental routing and administration 
requirements. 

P g Determination of floor areas required for manufacturing depart- 
ments, storage departments, assembling departments, offices, etc. 
Also for likely future requirements. 

P h Determination of departments which must be accommodated 
on the ground level and which may go on upper floors. 

P i Determination of railroad and trucking facilities that should be 
available for receipt and shipment of materials. 

P j Determination of total property area needed at once, and amount 
that should be reserved for the future. 

A tabulation should now be made of the areas necessary for 
different classes of work, for storage, and for all other purposes includ- 
ing yard requirements, the immediate and future needs being segre- 
gated. The open and enclosed areas should be totaled separately, and 
a note made of the enclosed floor space that does not necessarily have 
to be upon the ground floor. With all the foregoing data at hand, a 

1 Adapted by permission from Charles Day, Industrial Plants, pp. 19-30, 
46-48. (The Engineering Magazine Company, 191 1.) 



PLANT LOCATION 77 

fair opinion can be reached concerning the shape of property that 
should prove most desirable. 

The considerations have so far been based upon the assumption 
that an ideal property can be had ; and this is as it should be, for the 
site should be selected with a view to attaining as nearly as possible 
to such an arrangement. Of course the procedure is somewhat differ- 
ent if the location of the new plant is fixed in advance, as actual con- 
ditions must then be taken into account from the start with a view to 
minimizing apparent disadvantages. The remaining subdivisions 
of our preliminary service have to deal with the selection of the 
property finally determined to be most suited to our circumstances, 
and the final disposition of the building and equipment features. 

P k Selection of property that most nearly meets the requirements 
dictated by study of the foregoing factors. If possible, it is prefer- 
able to defer purchase until completion of preliminary work. 

Usually a number of sites are found to possess certain of the 
essential requisites, although each may fail to comply in some par- 
ticular with the ascertained requirements. Consequently, several 
properties are frequently taken under consideration pending the com- 
pletion of definite layouts, building sketches, and estimates of total 
cost. 

In order to make the best selection of property for an industrial 
plant, all the data bearing directly upon the desirability of the loca- 
tion for the business in question should be separately tabulated, 
and in this way the work will be greatly simplified through the ready 
elimination of undesirable sites. The essential data will, in most 
cases, comprise a knowledge of the character of soil for foundation 
purposes, expense that will be incurred to make the property avail- 
able, cost of property, availability of water, coal, oil, gas, or other 
raw materials, sewers, and protection afforded by the locality against 
destructive fires, etc. It has been assumed that the decision previ- 
ously reached as to geographical location has been based upon a knowl- 
edge of the desirability of the labor market, and the point best suited 
for the economical receipt of the materials or products upon which 
work is to be done and their final distribution to customers, and, of 
course, only such properties would be considered as afforded the 
requisite area. 

If one property appears to be undoubtedly preferable to all others, 
the engineer can then proceed accordingly; but, as has been stated, 



78 BUSINESS ADMINISTRATION 

it is possible that he may wish to work up preliminary layouts for 
several properties before making the final selection. In this case, 
precise information should be secured concerning each site that is to 
be taken under serious consideration. First a survey should be 
made, preferably by engineers in the employ of the municipality or 
county in which the site is located, for their intimate acquaintance 
with the status of local surveys, deeds, and records is valuable. The 
"plat," as a survey is called, should give the property limits and 
elevations (at the intersection of suitable cross-section lines) which 
should preferably refer to established datum. The location and 
character of all buildings or other structures and railroad sidings 
existing on the property should be carefully recorded, as well as 
conditions of this character in connection with the abutting prop- 
erties. 

All sewers, gas pipes, and water pipes and openings to same, as 
well as all electric circuits (both overhead and underground) occupy- 
ing the adjoining streets or crossing the property, should be indicated 
and their depth or height above the standard datum noted. The 
same plat should indicate the location of such test pits as are made in 
order to determine the character of the soil or wells that have been 
driven to ascertain the available water supply, and a note should be 
included calling attention to adjoining streams, if any exist, and to the 
nearest trolley system or railroad, if sidings are not available upon 
the property. 

P / Preparation of alternate layouts of departments, segregating them 
into one or more buildings of assumed types, taking into account 
all the foregoing factors including the selected property. 

P m Reconsideration of all work done so far and preparation of a revised 
layout incorporating as far as possible the best features of the vari- 
ous preliminary studies. Making outline drawings of buildings. 

P n Preparation of a classified estimate of cost based upon unit prices. 

P o Determination whether estimated expenditure would result in a 
"fixed charge" consistent with the probable profits of the business, 
i.e., can the business carry the necessary investment? 

P p Determination whether owner is prepared to make the total justi- 
fiable expenditure. 

P q Revision of layouts, if required by financial limitations (P o or P p 
or both) , and placing data and plans in suitable form to be used 
as a basis for the preparation of architectural and engineering 
drawings and specifications. 



PLANT LOCATION 79 

17. CITY, SUBURBS, OR COUNTRY 1 

Consider the relative merits of the three classes of location open 
to the prospective manufacturer, namely, city, country, or suburban. 
Cities, being natural centers for trunk lines or water transportation, 
usually offer superior advantages for obtaining raw materials and 
shipping finished goods. An abundant labor supply is obtainable as 
compared to other localities. If the plant is small and dependent on 
other industries as, for instance, repair shops or some closely articu- 
lated industry, the city offers superior advantages when these other 
industries are present, as they usually are. It is often easier to 
finance an undertaking in the city, cities offering better fields for 
obtaining subscriptions to stock or obtaining special inducements to 
locate, such as exemption from taxes or even large cash bonuses to 
assist in starting the enterprise. If the plant is small and is supplying 
the local market alone, the city offers market advantages that would 
not be so important to a larger plant. A plant located in a city 
enjoys municipal advantages such as good streets, sewers, gas, police 
protection, fire protection, etc. 

As opposed to these advantages the city location has the dis- 
advantage that land is high priced, and it is very often difficult for 
large works to secure a site within a city where buildings exactly suited 
to the purpose desired can be erected without great expense; and if 
the city is a growing one the taxes in time make the location too 
expensive. This is one of the reasons why many factories have, 
within recent years, been compelled to move to the country or the 
suburbs. City restrictions regarding smoke and other municipal or- 
dinances governing industry are questions that must be carefully con- 
sidered. While labor may be abundant in the city, the cost of living 
and hence the wages paid are, in general, higher than in the country. 

The advantages of a location in the country are not so numerous 
as those of the city, but they are often of paramount importance. 
Thus, if a water-power is obtainable or if a supply of pure water is 
necessary, as in paper-making, a country site may be very desirable. 
Land is cheap in the country and hence the factory can be built to 
suit the exact needs of the industry and ample provision made for 
growth. Taxes are low and restrictive ordinances not likely to hamper 
the activity of the plant. The larger the plant, the less it is dependent 

1 Adapted by permission from D. S. Kimball, Principles of Industrial Organi- 
zation, pp. 227-34. (McGraw-Hill Book Company, Inc., 1913.) 



80 BUSINESS ADMINISTRATION 

on other industries and hence the country site, in general, appeals 
to the large operator more than to a small one. The local market is, 
likewise, likely to be of less interest to the large plant. Undesirable 
neighbors can be more easily avoided in a country location and the 
danger from fire and other hazards resulting from surrounding indus- 
tries are also minimized. 

On the other hand, the labor supply of the country is usually a 
troublesome problem. The city offers advantages and amusements 
to the working classes that cannot be had in the country. An effort 
is made to offset these attractions by building model factory villages 
where employees may acquire homes on easy terms and enjoy the 
healthful life of the country. Of course the employer who engages 
in such an enterprise must expect to feel a greater responsibility 
toward his employees than he would in a city where the bond is much 
looser. But such work as this is worth while, and no doubt the near 
future will see a great amount of decentralizing of industry from the 
thickly congested centers in favor of country locations. Just as it is 
difficult to induce labor to leave the cities, so it is difficult to attract 
them away from good country industries if the conditions of life are 
made attractive; and labor troubles are likely to be less in a country 
location than in a congested city. 

The suburbs of many cities offer a compromise between the city 
and country and possess many of the benefits of both. Land can be 
obtained at a price far below city property, and trolley lines have 
made living in the suburbs cheaper than in the city and yet made it 
possible for the suburban dweller to take advantage of the attractions 
of the city. An examination of any of our large cities will show an 
immense amount of manufacturing in the suburbs, this location 
being particularly advantageous for fair-sized plants. 

From the above it will appear that the city location in general 
offers greatest attractions to the small plant, the suburbs are best 
adapted to fair-sized plants, and the country offers by far the greatest 
attraction and fewest disadvantages to the very large plant, provided 
an adequate supply of labor can be obtained. 

18. SATELLITE CITIES 1 

From the middle of Philadelphia, several departments of the 
Baldwin Locomotive Works have been shunted out into a small 

1 Adapted by permission from G. R. Taylor, Satellite Cities, pp. 1-14 
(D. Appleton and Company, 1915.) 



PLANT LOCATION 



81 



suburb. Flint, Michigan, two hours from Detroit, has been seized 
as the place for huge automobile factories. While the population was 
trebling in the first three years, several hundred operatives had to be 
housed in tents throughout one summer. A big corn-products plant 
moved from the middle of Chicago to the near-by prairies and a 
"glucose city," Argo, started up. It occupies part of a tract of ten 
square miles, which one promoting company is developing as an 




AROO 



pftEKKy HAMMOND 



OAK/ 



Chicago and Satellites 



"industrial district" and into which Chicago has already emptied 
more than two dozen establishments. Just outside Cincinnati a 
residential suburb, Norwood, is now the home of a score of manu- 
facturing concerns. Impelled partly by the arbitrary tolls charged 
on coal carried across the Mississippi River, industrial plants have 
moved over the bridges from St. Louis and founded a group of new 
towns in Illinois. The Standard Oil Company, a few years ago, 
poured out $3,500,000 on the bank of the Missouri a few miles from 
Kansas City, and the town of Sugar Creek sprang up. Yonkers long 



82 



BUSINESS ADMINISTRATION 



since lost its staid old character in a smother of hat and carpet fac- 
tories. The metropolitan manufacturing district stretches out in 
belts and flanges from New York into Long Island, Staten Island, 
and New Jersey, while eastern Massachusetts is a mosaic of mill 
towns. In some sections of the South scarcely a city of any size 
lacks one or more satellites thrumming with spindle and shuttle. 



WEU/TON 



fjcDW/KD/VlU 



CrRANlTECTY 



MADUON 




EA/T/T«LOUl/ 



St. Louis and Satellites 



Gary, with its population nearing 50,000, where in 1906 there 
were only rolling sand dunes covered with scrub oak, is thus seen to be 
but the largest and most spectacular example of the far-reaching 
industrial exodus. Far-reaching and fast-moving, for Gary had 
scarcely attained four-year-old dignity when work started on a still 
newer member of the United States Steel Corporation's brood of 
steel towns — Fairfield, first known as Corey, on the edge of Birming- 



PLANT LOCATION 83 

ham, Alabama. On the heels of Fairfield came the news that more 
millions and another plant would found another steel town near 
Duluth. 

This industrial exodus from city center to suburb was first seen 
conspicuously in the establishment of Pullman and Homestead in the 
early eighties. These two places were by no means the only fore- 
runners. South Omaha, for example, in 1883, sprang up around the 
stockyards at a railway junction so rapidly as to win the name "Magic 
City." These exceptional towns, suddenly created at the dictate of 
pioneer master minds of the new industrialism, thrilled the popular 
imagination. 

Many reasons are readily apparent for the location of these new 
industrial communities. The impulse toward cheap land, low taxes, 
and elbow-room throws them out from the large centers of population. 
These are the centrifugal forces. The centripetal forces are equally 
powerful and bind them as satellites beyond the outer rings of the 
mother city. Even the towns which, like Gary, have attained a 
considerable measure of self-sufficiency and lie perhaps across state 
boundaries are bound by strong economic ties. Through switch- 
yards and belt-lines, practically all the railroad facilities developed 
during years of growth, which are at the disposal of a downtown 
establishment, arc at the service of the industry in the suburb. It 
means much to be within easy reach of at least one large market for 
finished product. Proximity to a big labor market is a more impor- 
tant factor. 

The census bulletin sums up the industrial exodus in numbers of 
manufacturing establishments, in value of products, etc. From the 
standpoint of the common welfare, it should be reckoned also in 
terms of citizenship and human values. What of health and housing ? 
of leisure and income to make it count? of playgrounds and 
schools? of living costs? of city government, politics, and civic 
spirit ? 

There is a public challenge in the very fact that in these localities 
civic and industrial conditions are being created brand-new, on a 
wholesale scale, without the handicaps and restrictions which high 
land values and prior improvements impose on every effort to recon- 
struct the congested centers. Are we turning these advantages to 
account ? In our general municipal development we pay more 
and more heed to the counsel of city planner, housing expert, 
and sanitarian. We struggle to reshape our rigid, old-fashioned 



84 BUSINESS ADMINISTRATION 

conditions to fit newer and more workable molds, just as the manu- 
facturer has to tear out, rebuild, and build higher if he stays in the 
midst of congestion while his business expands. 

But have we set ourselves to inquire whether these made- to- 
order industrial cities, involving living conditions for thousands of 
people, are so shaped at the outset? In the planning of the great 
suburban industrial plant, marvelous skill and foresight are shown in 
adapting buildings and machinery to the processes through which 
stuff becomes finished product. Are similar skill and foresight 
applied to the development of the things through which houses may 
become homes, a construction camp a community, and livelihood, 
life ? Apparently the answer is often in the negative. 



See also p. 109. What City-planning Means. 

p. hi. The City-planning Movement. 



19. THE CAUSES OF CONGESTION OF MANUFACTURES IN 

NEW YORK CITY 1 

[The reader should regard this selection as a continuation of the 
discussion of the relative merits of city, country, or suburbs as loca- 
tions for industrial plants.] 

The following are probably the principal forces that have brought 
manufacturing industries into the city, or have retained them in it. 

First, immobility, i.e., the inability of certain old establishments, 
started on the outskirts of the city, to remove after the city's growth 
has enclosed them. Any disadvantages that each may suffer from 
congestion are counterbalanced by the difficulties and loss that 
would be incurred in transferring plant and employees, both bound 
to the soil by many ties, to a new locality. 

Second, the advantages of a transportation center. New York 
City, as a point of intersection of transportation routes and of trans- 
shipment from land to water and vice versa, is a most economical 
place for assembling divers materials for manufacture and for dis- 
tributing products. In combination with other advantages this force 
has drawn the following industries, among others, to New York City: 

1 By P. T. Sherman, former Commissioner of Labor, state of New York. 
Adapted from Department of Labor Bulletin, Vol. X (Nos. 36-39), 1908. 



PLANT LOCATION 



85 



Industry 



Number of Persons Engaged* 



In State 



In New York 
City 



Furs and fur goods 

Lead pencils and crayons 

Canvas and sporting goods 

Coffee and spice roasting and grinding . 

Paints, varnish, etc 

Articles of cork 

Cigars 

Cigarettes 

Flax, hemp, and jute 

Sugar and molasses refining 

Mineral oil products 

Dyes, colors, and inks 

Asbestos, graphite, etc 

Rubber and gutta percha goods 

Cabinet work, n.e.s 

Pianos, organs, etc 

Boat and shipbuilding 



8,066 
1,872 
1,584 
i,939 
3,259 
460 

28,028 
2,953 
7,963 
3,76o 

2,944 
2,098 
1,880 
4,883 
3,225 
13,163 
5,466 



7,660 
1,861 
1,286 
1,705 
2,939 
429 
20,695 

2,938 
6,253 
2,635 
2,119 

1,587 
i,3i3 
3,o77 
2,348 
10,134 
3,933 



*Notice the high percentage of the workers in these New York industries who are in the) city. 



Third, labor advantages. New York City contains an unusually 
large population of unskilled laborers, which is constantly being re- 
plenished and augmented by an unequalled immigration. This popu- 
lation is generally uneducated and poverty-stricken. Its standard 
of living is of the lowest. And competition for employment among its 
members is most intense. They are, therefore, peculiarly subject to 
exploitation, sell their labor at the cheapest rates, and submit to the 
most unfavorable conditions of employment. And there is always or 
almost always a surplus of unemployed left over for extraordinary or 
seasonal operations — a condition seldom found elsewhere. For special 
reasons peculiar to the predominating races the superabundance of 
labor is greatest in the industry group "clothing, millinery, etc." 
Consequently competition for employment therein is most severe, 
and there result — in spite of the higher cost of living in the city — 
rates or wages and conditions of employment that defy competition 
elsewhere. 

There is no such superabundance of skilled labor. In fact, owing 
to the entire neglect of industrial training in the American system of 
education, there is probably no part of the United States where there 
is a surplus or even a sufficiency of skilled labor. The greater part of 
highly skilled labor comes from abroad; and because it cannot in 
general be imported by contract, it must be picked up from ordinary 



86 BUSINESS ADMINISTRATION 

immigration. As New York City is the gateway for the bulk of immi- 
gration and the first resting place of a large part of it, local industries 
possess some advantage in securing this skilled labor and in the 
greatest variety. Moreover, merely from its size and from its centrip- 
etal attraction for the unemployed, the city usually holds the greatest 
number and variety of unemployed skilled laborers. The influence 
of these advantages is difficult to trace; but it has been material in 
bringing about the establishment of and in maintaining at least some 
industries in the city, among which the following may be cited as 
examples: pianos and organs, etc. ; professional and scientific instru- 
ments; clocks and time recorders; jewelry and gold pens; lapidary 
work; plaster casts and ornaments; lithographing and engraving; 
dyes, colors and inks; beveled glass and mirrors; tobacco pipes. 

Fourth, the advantages of convenience of delivery where pro- 
duction is chiefly or largely for local consumption, as against the 
disadvantages of out-of-town production, i.e., expense and danger 
of transportation and delay and uncertainty in delivery . This force 
is intensified in New York City by peculiar railroad terminal deficien- 
cies and intra-urban traffic congestion. In estimating this influence, 
not only the consumption of the resident enumerated population is 
to be calculated, but also that of the large and extravagant visiting 
population. This influence is controlling, by itself in some instances, 
and in others in combination with some of the other forces elsewhere 
enumerated, in attracting the following industries: steam heat and 
power; electric light and power; malt liquors; artificial ice; confec- 
tionery and ice cream; bread and bakery products; crackers and 
biscuits; macaroni and food pastes; groceries, n.e.s.; mineral and 
soda water; bottles and jars; pressed, blown, and cut glass; beveled 
glass and mirrors; mirror and picture frames; paper boxes and 
tubes. 

Fifth, the advantage to manufacturing industries closely con- 
nected with other industries of propinquity to the latter. This force 
includes the preceding, i.e., convenience of delivery and also something 
more, i.e., convenience of accessibility during any stage of manu- 
facture, etc. This is well illustrated by newspapers. Their manu- 
facture, i.e., preparing and printing the paper, must be carried on in 
close proximity to the professional work of gathering news, etc., and 
editing, and at a point convenient for prompt distribution through 
commercial channels. Another illustration is the jewelry industries, 
in which many forces tend to unite their manufacturing and com- 



PLANT LOCATION 87 

mercial branches in one establishment and to locate that establish- 
ment at the commercial center. 

The following are some different phases of this influence, with 
examples: 

a) Convenience for local repair, renewal, alteration, or extension 
of articles, is illustrated by the following industries: railroad repairs; 
laundries; telegraph, telephone, and fire-alarm apparatus; boat and 
shipbuilding; cleaning and dyeing. 

b) The attraction of dependent or subsidiary manufacturing 
industries to the same locality as those other industries which they 
serve, or upon the waste or by-product of which they are dependent, 
may be sufficiently shown by the few following examples: clip sorting; 
sorting waste paper; glue, mucilage, etc.; cigar and fancy wood 
boxes; cooperage; dyeing, finishing, etc., of textiles; smelting and 
refining. 

c) The advantage, convenience, or necessity of having the factory 
close to the commercial shop or market can be best shown under a 
commercial classification : 

In custom work, by tailoring and dressmaking. In job work, by 
printing and publishing. In retailing, by the finishing, alteration, and 
repair departments of stores. Originally the practice of maintaining 
such departments was material in only a few trades; but the "depart- 
ment stores" have extended it over a wide field and to include inci- 
dentally much complete manufacture. In wholesale selling, by the 
widely prevailing practice in many of the clothing trades of assimi- 
lating their production to custom or "job work" by manufacturing 
in lots under the "hurry orders" and directions of visiting buyers. 

All the industries included in the industry group, "clothing 
millinery, etc.," are examples of the effect of this influence; and also 
the specific industries enumerated in the following list: printing and 
publishing; paper goods, n.e.s.; bookbinding and blank books; 
lithographing and engraving; mirror and picture frames; traveling 
bags and trunks; mattresses, pillows, etc.; cabinet work, n.e.s.; 
upholstery goods; furniture and upholstery. 

Turning now to the causes of relatively excessive concentration 
in the congested districts of the city, we are forced to take New York 
County to represent the congested urban center, and the other coun- 
ties to represent its suburbs. It would be more in accordance with 
actual conditions to take Manhattan borough alone for the congested 



88 BUSINESS ADMINISTRATION 

district, and to class all the other boroughs as suburbs; but the figures, 
being collated in the bureau report by counties only, are not available 
for any better plan of comparison than that adopted. We have seen 
that the principal forces operating against the city are operating 
particularly against its congested center, i.e., New York County, 
but that nevertheless manufacturing is particularly concentrated 
within that county. Therefore the forces above enumerated which 
operate in favor of the city must also operate particularly in favor 
of that county. They may be considered in order in this con- 
nection. 

First, immobility is purely negative, acting only to prevent the 
full operation of the opposite forces. But such as it is, it operates in 
proportion to the number of establishments, and as there are more 
establishments in New York County than in all the other counties 
together, it affects New York County particularly. 

Second, the advantages of New York City as a transportation 
center are peculiarly in favor of New York County. It has almost a 
monopoly of the city's railroad terminals, and it is the terminal of a 
large majority of the regular water transportation lines. Truckage 
from their terminals to the other counties is slow and costly, owing to 
bridge and ferry congestion. It is only for goods imported by special 
charter or such as can be advantageously lightered from western 
railroad terminals and from terminal docks that the other counties 
are on an equal footing. 

Third, the advantages of cheap labor are all with New York 
County. The colonies of recent immigrants are nearly all in that 
county. The immigrant clings to a home in the colony of his friends 
for many years, and he cannot be employed most economically at a 
distance from his home on account of the delay, uncertainty, and 
expense of transportation. There is, therefore, often an abundance of 
cheap labor available in New York County when it is scarce in the 
suburban counties. This attracts many factories to New York 
County, and their existence there with their opportunities for employ- 
ment aids in holding the immigrants within that county. In this way 
an endless chain of congestion is created. 

Fourth, the advantages in delivery for local consumption cause 
manufacturing to concentrate in New York County out of proportion 
to its population, because its consumption is out of proportion to its 
enumerated population, for the reason that transients and visitors 
are concentrated in that county, and that a large proportion of the 



PLANT LOCATION 



89 



population of the other counties carry on their business and therefore 
live and consume during the day in New York County. The conges- 
tion at the bridges and ferries across the water barriers that separate 
New York County from the other counties is sufficient to make it 
uneconomical to manufacture in the latter for consumption in the 
former, to any material extent. 

Fifth, the advantages of propinquity to other industries and 
businesses are all in favor of New York County, because in it is con- 
centrated the major part of the city's commerce. It therefore appears 
a priori that the main forces that operate to draw manufacturing to 
New York City also act particularly toward its most congested 
county. 

Turning to the concrete side of this subject, the most material 
factor in congestion is the group "clothing, millinery, etc." There 
are 204,519 persons engaged in the industries included in this group in 
New York City, 178,094, or over 87 per cent of whom carry on their 
work in New York County. This group is, therefore, both the most 
numerous and the most concentrated. The following are the figures 
for its most congested industries: 



Industry 



Tailoring 

Dressmaking 

Suspenders and other furnishings 

Men's neckwear 

Women's white goods 

Infants' wear 

Ladies' neckwear 

Corsets and garters, etc 

Artificial feathers and flowers . . . 

Millinery 

Curtains, embroideries, etc 

Umbrellas and parasols 

Cleaning and dyeing 

Clip sorting 



Number of Persons Engaged 



In New York 
City 



59,251 

78,868 

990 

2,998 

11,302 

2,549 

4,559 

2,069 

4,262 

8,569 
1,614 
1,107 
1,604 
1,696 



In New York 
County 



47,907 
75,046 
990 
2,897 
9,213 
2,293 
4,551 
1,756 
4,225 
7,792 
1,380 
1,106 

1,151 
1,467 



So much for the extent and causes of the concentration and con- 
gestion of manufacturing in New York City. New York City is 
primarily commercial. Its commercial center is the lower end of 
New York County — the lower half of Manhattan Island. This 
district is congested with commerce and residences; and in addition 



90 BUSINESS ADMINISTRATION 

there are in the county as a whole — and in large proportion in this 
congested part — 76 per cent of the manufacturing population of the 
city, or 41 per cent of such population of the state. 

C. Changing Location and Location Planning 

A review of the material thus far covered in this chapter will 
make it clear that there are many factors making for change in the 
location of existing business units. Under what circumstances should 
their managers yield to these factors? How can they determine 
what new site shall be chosen ? Can they secure assistance in study- 
ing such problems? The last two questions apply also to the case 
of a new business venture which may be in contemplation. 

It is not necessary to present here material upon the factors 
making for change. Problems 1 to 9 below will serve to recall certain 
aspects of this matter either already presented in these readings or 
lying in our general knowledge. It is worth while, however, to present 
certain material bearing upon the weighing of evidence which may 
be available concerning alternative locations (Selections 20 and 15); 
upon the various enterprises which provide material looking toward 
the solution of location problems (Selections 21 to 24); and upon the 
awakening interest of society at large in certain location matters 
(Selections 25 and 26). No exhaustive treatment of any of these 
topics will be attempted. Instead, both the selections and the 
questions below should be regarded as samples of the problems at 
issue. 

A surprisingly large number of agencies assemble and distribute 
data of value to the manager who is studying plant location. To 
begin with there are various governmental reports, both state and 
federal, of which the census volumes will serve as an illustration. 
Such material, speaking generally, tells what has happened rather 
than what will happen and is accordingly of value primarily as back- 
ground material. The drift of the past may or may not be indicative 
of the tendency of the future. Again, industrial agents of railways 
quite commonly collect evidence — often ex parte evidence it is true — 
concerning opportunities along their lines. Sometimes they make 
quite comprehensive surveys and try to promote a balanced develop- 
ment of industries; sometimes their data are little more than summa- 
ries of local opinion in the communities concerned. Some real estate 
firms, too, make more or less of a specialty of studying sites, particu- 
larly of factories, and are in a position to give the interested manager 



PLANT LOCATION 91 

local material of very great value. Closely related to the work 
of such real estate firms is the development company of the sort 
mentioned in selection 21, which may be said to charge a price for 
services rendered in connection with plant location and construction. 
Naturally, their literature is easily secured. Material in which more 
of the comparative element enters may be secured from some firms 
of industrial engineers who have built up files of information upon 
location problems and who undertake to investigate appropriate 
locations for their clients. One must not overlook, too, the local 
chambers of commerce, or other similar organizations, who sing the 
praises, sometimes with helpful analysis added thereto, of the com- 
munity opportunities and may even stand back of some development 
project (see Selection 23). A very respectable beginning has been 
made in the development of professional skill in dealing with location 
problems. 

PROBLEMS 

1. Name some industries whose location will probably shift in the near 
future. Give your reasons for believing that such will be the case. 

2. "Local skill, traditional practice, personality, import tariffs, which have 
built up and localized industries must succumb." Why or why not ? 

3. Is it likely that municipal legislation, or regulation, will tend more 
and more to exercise control over location of industries ? Will any 
other regulating agencies ? 

4. As time goes on do you expect to see industries more or less dependent 
upon location in proximity to skilled labor supply ? 

5. Can you cite cases where (a) the growth of technical knowledge, 
(b) movements of population, (c) transportation and communication 
improvements, (d) social control, have led to changes in location ? 

6. Tabulate the reasons why one may expect changes in industrial location 
in the future. 

7. "There is a certain amount of inertia chat attaches itself to industry 
when it has once been successful in a given place." What are the 
component parts of the inertia ? 

8. "As society has become increasingly one of impersonal relations, and 
firm reputation becomes a less significant asset, scientific analysis of 
plant location problems becomes more important." Why or why not ? 

9. "As any country develops industrially, as transportation becomes more 
effective and good labor supply more widespread, the intelligent loca- 
tion of manufacturing enterprises must be governed increasingly by 
strict economic consideration and less by inherited influences." Do 
you agree ? What difference does it make to you ? 



92 BUSINESS ADMINISTRATION 

10. "In these days of indirect costs, small differences are great differences. 
This means that any single question, such as location, affecting over- 
head profoundly is worthy of most careful study." Will this have a 
bearing upon re-location? 

ii. "The location and construction of a large modern industrial plant may 
require the services of several specialized advisers." Why? Who 
are they ? 

12. What sort of educational training and experience would you consider 
necessary for a person who is to act as industrial agent or adviser on 
questions of factory location ? 

13. Is there a place in the industrial world today for the professional plant 
location experts ? What will be the probable future of the profession ? 

14. What should you say of the value of an "industrial survey" made by 
a board of trade, a commercial club, a municipal commission, an indus- 
trial engineer, a real estate agent, a railway company? What is an 
industrial survey ? 

15. Tabulate as many sources of information as you can which could be 
used if you were studying where to locate a plant. 

16. Notice the table on page 95. Comment upon the value of any such 
table for the purpose at issue. Comment upon the value of this 
particular table. 

17. What is a method by which you would go about determining whether, 
in a centralized bargaining center, there was room enough for 
another business of the same nature as those already being successfully 
carried on ? 

18. Can accounting be used to test the merits of a given location ? If so, 
can it be used prior to the actual location ? 

19. What general principles explain the success of such private enterprises 
as the Central Manufacturing District ? 

20. What would be the advantages and disadvantages of locating in such 
an area ? Can you tell whether it would be a better proposition for 
some businesses than for others ? 

21. What do you regard as the underlying principles in case of such enter- 
prises as the Bush Terminal or the Toledo Factories Buildings ? Some 
writers call such enterprises industrial incubators. Why? What 
classes of enterprises should you expect to do well in such buildings ? 

22. Free sites and local inducements are often injurious to both the city 
and the factory. Do you agree or disagree, and why ? 

23. What interest, if any, has the business manager in town planning? 
Is his interest, if any, philanthropic, artistic, or pecuniary? Answer 
the same question with respect to garden cities. 

24. "For the general comfort of the cities, factories should be confined to 
their special areas." Why ? Has the manufacturer any gains flowing 
from this districting ? 



PLANT LOCATION 93 

25. "These are days of measuring devices in business." What measur- 
ing devices can you enumerate as being useful in plant location or 
re-location ? 

26. Draw up an outline of the main points in this section. 

20. HOW TO STRIKE A BALANCE IN LOCATION FACTORS 1 

[This selection is an interesting illustration of the methods com- 
monly used by engineers. It is helpful to think of such devices as 
" measuring aids of administration." Does the classification of factors 
here given contradict the classification given on page 15 ?] 

In many parts of the United States, particularly the portion east 
of the Mississippi River, manufacturers are confronted with the 
problem of reorganizing and rehabilitating their present plants in 
order to meet changed or changing conditions. Some of these prob- 
lems are brought about by tariff influences, others by western compe- 
tition, and still others are due to changes in the sources of raw 
materials. 

The question as to how this rehabilitation is to take place presents 
itself squarely to the management. This question usually is: Shall 
we develop our present property and plant by such additional acquisi- 
tions of property as will take care of the needs of the business — or 
shall we consider selling or leasing our present plant and constructing 
a new one in a more advantageous locality, with perhaps better 
natural characteristics ? 

Let us see then if we can strike a balance of the various factors 
entering the problem that will help us intelligently to decide the 
question. 

By drawing up a list of questions that are the result of analyzing 
the situation and ascertaining the facts, we find that practically four- 
teen items cover the important factors relating to the present plant 
location and that seven items suffice for the consideration of a new 

location. 

PRESENT LOCATION 

1. P.L. — What is the investment in the present plant ? 

2. P.L. — How much of it is fixed capital? 

3. P.L. — What proportion of (2) P.L. could be recovered by the sale of 

the property ? 
1 Adapted by permission from H. V. Coes "The Rehabilitation of Existing 
Plants as a Factor in Production Costs," in The Engineering Magazine, XLIX 
(19*5), 357-72, 5 6 o-73- 



94 BUSINESS ADMINISTRATION 

4. P.L. — How much additional property would have to be acquired to 

properly develop the plant ? 

5. P.L. — What would the investment be ? 

6. P.L. — Is the labor market satisfactory ? 

7. P.L. — Is the raw-material market satisfactory? 

8. P.L. — Are the shipping facilities adequate ? 

9. P.L. — Can (8) P.L. be made so ? 

10. P.L. — Can the present buildings be suitably altered to adequately 

serve the business ? 

11. P.L.— What will (10) P.L. cost? 

12. P.L. — Can the present buildings properly be made a part of a logical 

comprehensive development of the plant? 

13. P.L. — What are the fixed charges of the present plant ? 

14. P.L. — What is the production cost per unit ? 

NEW LOCATION 

1. NX.— What will the land for a new site cost? 

2. NX. — 'What will the buildings cost when completed and ready for 

occupancy ? 

3. NX. — What will be the fixed charges on (1) NX. and (2) NX. ? 

4. NX. — How much will (1) NX. and (2) NX. be reduced by (3) P.L. ? 

5. NX. — Will (6), (7), and (8) P.L. and other considerations be sufficiently 

improved as to affect production cost, (14) PX. ? 

6. NX. — Will the production cost per unit be lowered? 

7. NX. — Will the margin between the selling price and production cost 

pay (3) NX. plus a sinking fund and leave a sufficient profit to 
warrant the undertaking ? 

If we tabulate the facts brought out in any given case (such, for 
instance, as the assumed one), the mind can more readily compare 
them and can intelligently weigh the information with a view to secur- 
ing the proper balance. 

If we list the ''factors governing the location of an industrial 
plant," we find that these are divided into twelve groups. The 
" weight" given in parenthesis at the right is an arbitrary scale of 
values given to each group and subdivision thereof, according to its 
relative importance to the total factor valuation. In our assumed 
case, for example, let us designate "present location factors" as 
minus (—), and " competitors' or new location" as plus (+). Accept- 
ing then the scale of weights, let us balance up the relative advantages 
of our location with the ideal, and similarly our competitor's location 
(which we think is better than our own) also with our ideal and set 
these values down. Suppose we find that our present location meas- 



PLANT LOCATION 95 

ures up to only 55J per cent of our ideal — our competitor's, on the 
other hand, 75 J per cent of the ideal. Clearly, much light has been 
thrown upon our problem. 

1. Proximity of raw-material market (weight i£) 

a) Rail service 

b) Water service 

c) Supply 

2. Proximity to consumers' market (weight i£) 

a) Large cities 

b) Rail service 

c) Water service 

d) Advertising value or influence of plant 

e) Competitors 

3. Labor Market (weight 2\) 

a) Character of labor and supply 

b) Percentage of unemployed females (women and girls) 

c) Percentage of unemployed boys (above legal factory age) 

d) Price of labor — cost of living 

e) Specialization of labor 
/) Influence of climate 
g) Associations or unions 

4. Power (weight 1) 

a) Price and character of fuel (coal, gas, oil) 

b) Hydro-electric or water power 

c) Central station 

5. Influence of climate (weight |) 

a) On labor 

b) On product 

6. Utilization of waste products (weight |) 

a) Disposal of waste products 

b) Market value of waste products 

c) Cost of disposing of same, if unmarketable 

7. Perishability (weight |) 

a) Raw materials 

b) Finished product 

8. Freight rates (weight I) 

a) On raw materials 

b) On finished products 

9. Legislation, regulation, or ordinances (weight J) 

a) State legislation (corporation laws, taxes, employers' liability) 

b) Municipal, town, or county regulations or ordinances (taxes, factory 
building inspection) 



96 BUSINESS ADMINISTRATION 

10. Banking facilities (weight i) 

a) Size of — handling pay rolls, etc. 

b) Credit 

c) General utility 

11. Site of real estate (city, suburb, country) (weight f ) 

a) Price of 

b) Character of soil 

c) Cost of preparing site 

d) Foundations 

e) Floods 

12. Building materials (weight j) 

a) Local sand, gravel, etc. 

b) Crushed stone 

c) Brick 
/) Timber 
e) Steel 

/) Cement 

It should be borne in mind, however, that the scale of weights must 
be varied to suit the industry. It might very well happen for a par- 
ticular industry that (7) would be a very important factor and the 
other factors scaled accordingly. But this method has the advantage 
of enabling us to judge the relative importance of the factors impar- 
tially and gives the mind definite numerical values to weigh instead 
of abstruse facts. 

21. AN EXAMPLE OF PRIVATE ENTERPRISE IN ' 
DEVELOPING PLANT LOCATIONS 1 

[There are many cases in which private enterprise has done much 
of the preliminary work in plant location and construction and sold 
its services to businesses seeking locations. The Central Manufac- 
turing District of Chicago may be taken as typical of such cases. Does 
the classification of relationships given on page 15 fit in with this 
selection ?] 

The reason we recommend the Central Manufacturing District 
as an ideal location with respect to service is that it offers the highest 
type of transportation assistance. The Chicago Junction Railway 
serves the District throughout and moves any kind of freight in any 
quantities. It is what is known as an inner belt line. Thirty-nine 

1 Taken from a letter sent out by one of these concerns, the Central Manu- 
facturing District of Chicago. 



PLANT LOCATION 97 

railways, twenty-two of which are great systems, terminate in Chi- 
cago, the world's greatest railroad center. It is easy to see what 
such tremendous facilities mean to manufacturers situated in this 
city. The Chicago Junction Railway represents the value of all of 
these facilities combined, in that it connects with each and every one 
of them and gives to the manufacturer located on its rails the same 
sendee which could be obtained by direct connection with or location 
upon any one of them. 

In speaking of Chicago Junction Railway Service any system may 
be used applicable to either carload or L.C.L. shipments. Carloads 
made up at the plant of any concern in the District can be sealed at 
its doors and projected with the utmost possible dispatch via any 
route specified at the through Chicago rate without the various 
transfers, inspections, and possible reloading of contents. L.C.L. 
freight usually is more or less of a bugbear to the manufacturer. 
Ordinarily it is accepted only at certain stations, and often in the con- 
gestion at these stations shipments which he particularly desires to 
have forwarded immediately become misplaced or lost, and he loses 
the business of a good customer through the ensuing delay. In 
order to reach these stations it is necessary for the producers to 
maintain expensive automobile or horse-drawn vehicle transportation. 
The Chicago Junction L.C.L. freight-handling system circumvents 
delays, avoids the maintenance of truck fleets, and eliminates endless 
worries. It is roughly as follows: 

To the several union freight stations maintained in or near the 
Central Manufacturing District, L.C.L. shipments may be forwarded 
by trap cars upon their arrival at the stations. These trap cars are 
unloaded and contents classified according to destination. Any in- 
dustry may put in the same car shipments destined to any number of 
points. The station classification lumps the shipments to any one 
distributing point and these are loaded together in a car which is 
dispatched directly to the gateway point. This car is not disturbed 
in any way from the moment it leaves the union freight station until 
it arrives at the gateway point, where its contents are broken up for 
distribution. Outgoing freight is pulled from the union freight 
station twice daily. Locomotives from the various railroads come to 
these stations and extract the quotas for their several lines. Freight 
sent in is dispatched the same day. With the Chicago Junction each 
day's business is separate unto itself. Each morning sees a clean 
slate to begin upon. Its service is absolutely dependable. 



98 business administration 

Incoming freight destined to the various industries in the Central 
Manufacturing District is handled with the same dispatch, but in 
reverse order. It comes to the Chicago Junction Railway from the 
various railroads and is delivered at once, carloads remaining intact 
to the doors of the industries, package cars being broken up and 
their various contents classified according to assignees. 

Several years ago there was instituted what is known as the 
Traffic Bureau of the Associated Industries of the Central Manu- 
facturing District. This bureau draws its members from the various 
industries in the District and employs a traffic director, who is 
familiar with all phases of the traffic problem. It is his duty to secure 
co-operation from the various trunk lines, also to see that the Chicago 
Junction Railway maintains its standards of service at all times. 
The traffic director answers all complaints, investigates delays, traces 
shipments, suggests betterments, and generally attends to the shippers' 
interests. 

There are industries which have a great interest in water trans- 
portation. On account of its cheapness it is highly desirable when- 
ever practicable. One branch of the Chicago River flows through the 
Central Manufacturing District and is used by a few of the industries 
which are fortunate enough to have dock property. It is not used to 
the extent it might be for the very excellent reason that at Twenty- 
Sixth and River streets the Chicago River and Indiana Railroad, an 
ally of the Chicago Junction Railway, maintains a large dockhouse 
on the main river and the drainage canal, which has a capacity suffi- 
cient to permit loading ten large lake boats at one time. This feature 
represents considerable value to interests whose important points of 
delivery are other cities situated on the Lakes. It also facilitates 
the ingress of many raw materials. 

Chicago is the world's great central market. It is the distributing 
center of the United States, the financial center of the West, and lies 
within easy distance from the sources of innumerable raw materials. 
Among these might be mentioned iron, copper, lead, zinc, petroleum, 
lumber, grain, and many others. Bituminous coal in large quantities 
is produced within a radius of two hundred miles. Just as Chicago is 
the center for the Middle West, so the Central Manufacturing Dis- 
trict is the center of Chicago. The advantages claimed for Chicago 
are more nearly identical with those claimed for the Central Manu- 
facturing District than they could be with any other industrial dis- 
trict in the city. 



PLANT LOCATION 99 

The problem of securing labor to carry on the business of an 
industry is of paramount importance. There is no judgment shown 
in locating a manufacturing plant, no matter how splendid the site, 
nor how excellent the railway facilities, where the manufacturer is 
unable to draw the necessary help. Many plants have been known 
to fail simply because in seeking locations, they have neglected this 
most important prerequisite. Again the Central Manufacturing 
District proves its superiority over other locations. Within four 
miles from the corner of Thirty-ninth Street and Ashland Avenue 
dwell 1,000,000 people. Of this number about 500,000 are male 
adults and 400,000 female adults. There are a number of nation- 
alities represented in this population, but the American percentage 
covers more than half of the number. 

After the location has been found suitable in point of proximity 
and adequate labor supplied, the problems of transportation for this 
labor and its stabilization when once enlisted come into consideration. 
People must have means of getting back and forth between their 
homes and their employment. If their employment is easily reached 
without heavy expenditure of time, working people are much more 
liable to be satisfied. The Central Manufacturing District is 
bounded and traversed by several street car lines. North and south 
lines on Halsted, Morgan, Ashland, and Western lead directly 
to it, while Thirty-fifth and Thirty-ninth Street lines permit 
crosstown transfer to within three or four minutes' walk from any 
location. 

The Central Manufacturing District has developed standard 
designs which are repeated in its buildings as they are put up. The 
best possible lighting arrangements, sanitary equipments, and safety 
appliances, including complete sprinkler installations, are features of 
this construction. The exteriors in conformity with the standard 
design adopted are made attractive by towers which in many cases 
also serve to carry the tanks for sprinkler systems, and the use of 
terra cotta, which does not add materially to building costs, but 
at the same time distinctly adds tone to the general appearance. The 
perception of the dullest worker is awakened to the fresh parkways 
in front of the buildings and he naturally regards his place of employ- 
ment with pride in its attractiveness. The attitude in which the 
laborer enters the place in which his days are spent greatly affects his 
efficiency and the quality of the service he will perform for his 
employer. 



IOO BUSINESS ADMINISTRATION 

The value of advertising has come to be felt with greater depth and 
sincerity just within the past few years. There is a great deal to be 
gained by an alliance with an organization whose progress and ideals 
are unquestioned. It is a very creditable advertisement for a manu- 
facturer to say that he is located in the Central Manufacturing Dis- 
trict. The District has become known as the advocate of industrial 
right living. For a manufacturer merely to say or to advertise the 
fact of his location in this District is to promise to his labor ideal 
working conditions, to the people from whom he buys the assurance 
of his growth and added requirements of the materials which they have 
to sell, and to his customers the best product at reasonable prices 
and reliable service. 

The District has many advantages which cannot be approximated 
elsewhere in an industrial and manufacturing center. It is provided 
with well-paved streets, cement sidewalks, adequate sewer and water 
lines, grass parkways, and efficient lighting and power systems. 
Within its boundaries are located the Central Manufacturing District 
Bank and Club and the Western Union and Postal Telegraph offices. 
The Wells Fargo Express Company has an office in the District and all 
other express companies give the District preferred service. The 
mail service throughout the District is excellent. 

Tenants are located in the Central Manufacturing District under 
one of the following forms of contract: 

a) Sale of ground for cash, purchaser agreeing to make substantial 
improvements within a reasonable time. 

b) Contract of purchase. Under this form of contract the trus- 
tees would agree to erect the building and sell both land and building 
upon the basis of a payment of 25 per cent of the estimated valuation 
of land and building in cash upon the signing of the contract, the 
balance to be spread over a term of ten years, with interest on the 
deferred payments at 6 per cent per annum. 

c) Long-term lease. Under this contract the annual rental would 
be 5 per cent upon the value of the land as based, plus 8 per cent on the 
cost of any building and improvements erected by trustees, the tenant 
to pay in addition taxes and insurance. The term of our lease is 
twenty-five years. 



PLANT LOCATION 101 

22. ANOTHER EXAMPLE— THE BUSH TERMINAL 1 

Bush Terminal is actually an industrial city. It contains fac- 
tories, storehouses, restaurants, a trolley line, a hospital, a gymnasium, 
three clubs, a moving picture show, schools, a post-office, a telegraph 
office, wireless station, express offices, wharves, piers, railways, stables, 
power sub-stations, and all the miscellany of a busy city of almost 
three hundred separate industries. 

Within the bounds of Bush Terminal there is carried on as much 
manufacturing and general business as would normally be found in a 
thriving city of 250,000 inhabitants. The actual working population 
of the Terminal is over 24,000. In approaching the Thirty-ninth 
Street section of Brooklyn, one is struck with its resemblance to the 
shore line of Manhattan, but on a much larger and more spacious scale. 
Extending out into the water are enormous piers which characterize 
the water-front of New York City itself. As many as twenty-seven 
steamships at one time have been docked at these piers, with room 
for many more, and so modern are the facilities for loading and unload- 
ing vessels, so spacious the waterways between the piers, so complete 
the system of railroad tracks which lead from them, that their steamer 
capacity can be multiplied by three when compared with any other 
similar piers along the Atlantic seaboard. Behind these piers there 
stretches a complicated system of railroad tracks which resembles a 
huge freight yard or the terminal of a great railroad, which, in fact, it 
is, and, more than this, the terminal of many great railroads. Behind 
this freight yard again are a series of model warehouses of huge 
capacity, splendid gray-white structures of most unusual size, so 
designed that every inch of space may be used to the greatest advan- 
tage, and designed further to give the very maximum of ease and 
rapidity in filling them with, and emptying them of, merchandise of 
whatever kind. Behind these warehouses more railroad tracks 
commingle in a big humming system, and then is seen a long vista of 
still more warehouses in orderly rows, so compact that one scarcely 
realizes the enormous territory they cover. 

Stretching away to the north is row upon row of gigantic model 
loft buildings — mammoth granite-looking structures — larger than 
New York skyscrapers, something of the same appearance even in 
height, through their enormous window space and by reason of their 
outward appearance of being built of gray stone. These, too, are 

1 Taken from various advertising literature of the concern. 



102 BUSINESS ADMINISTRATION 

of steel and concrete and, although they are silent outside, they are 
humming within with the ceaseless activity of thousands of workers. 

The success of this industrial community is summed up in two 
words: service and co-operation. In theory the administration of 
Bush Terminal is extremely simple; in operation it is highly complex 
and calls for expert knowledge in many branches. The principle 
upon which the Bush Industrial City is founded may oe stated 
briefly: to supply the manufacturer with every service that can be 
secured economically upon a co-operative basis. 

Of what does such service consist ? First, of course, transporta- 
tion facilities. No manufacturer can progress very far toward large 
success without adequate and economical means of receiving his 
raw materials and shipping his finished product; in fact, many a 
promising business which today is struggling along as a semi-failure 
might be a big success with proper shipping facilities. Next in 
importance are power and steam for manufacturing. These can be 
supplied upon a co-operative basis at less final cost than if individually 
generated. Fire protection is a service which can be secured most 
economically by a community, and such protection, if provided 
upon a thorough engineering basis, means substantial saving in 
insurance. The scientific management of the labor market and the 
operation of a mutual employment bureau is a service of tremendous 
importance. Finally, having available space for storage of seasonal 
stocks and having additional manufacturing space always ready to 
accommodate a growing business are factors which no far-sighted 
executive overlooks. 

There are, of course, many minor forms of service which can be 
supplied by a community at a fraction of what they cost the indi- 
vidual. Night watchmen, porters, emergency hospital with doctors 
and nurses, local delivery service, express and mail facilities — these 
merely suggest things which a well-managed, concentrated industrial 
community may enjoy virtually without cost. When, as at Bush 
Terminal, almost 300 tenants "club" together in the purchase of 
such items, the individual tax upon the "overhead" is hardly 
appreciable. 

According to the system in vogue, incoming freight shipments 
which arrive at the New Jersey railway yards on one day are placed 
upon the siding of the Bush tenant's building early the following day. 
The cartage expense, both in time and money, is reduced to the trans- 
ferring of the freight from car to loading platform and thence to the 



PLANT LOCATION 103 

tenant's floor. A man with a hand truck travels probably fifty feet 
to accomplish such " cartage." This man, by the way, is an employee 
of the Bush Terminal. The manufacturer-tenant employs no truck- 
men, owns no horses or motor cars, requires no porters or roustabouts. 
Freight consigned to him f.o.b. New York means to the Bush tenant 
that the freight is laid down inside his own factory. 

Outgoing shipments are handled with equal facility. The manu- 
facturer occupying space in the Bush Industrial City simply notifies 
us that he has so much freight to be shipped. If it amounts to a 
carload, the car is placed on the siding at his door; we receipt for the 
freight at his own floor, put it aboard car and deliver the car to the 
proper railway at its Jersey terminal yard. Less than carload ship- 
ments of several tenants are frequently grouped and placed by us 
in through cars so that they reach destination without transfer. 
In any event, the tenant has absolutely no worry or expense in freight 
handling. It is all done upon a community basis. The freight, in 
and out, of 276 tenants is collected, assorted, billed, and forwarded 
by a co-operative organization which means the minimizing of delays 
and the elimination of trouble, waste, and expense. 

Electric current for light and power is furnished to Bush tenants 
at 3.3 cents per kilowatt-hour. This is approximately one-half the 
rate paid by the average manufacturer in New York City, and is 
probably less than the generating cost of current in the isolated plant 
of the average small-town manufacturer. Here again we have an 
example of co-operation. The Bush Terminal buys current for all 
its tenants and gives to all the benefit of a wholesale rate. The 
advantage is strikingly shown in the matter of lighting, for the tenant 
who uses comparatively little power in his manufacturing process is 
still enabled to light his premises at the 3.3 cent rate, where the 
same manufacturer located in New York would probably pay 7 . 5 cents 
per kilowatt-hour for electricity for lighting. 

A similar arrangement in regard to steam for manufacturing pur- 
poses is in vogue. Steam is sold for 1 cent per horsepower-hour and 
is furnished in any quantity and at any time. Since the steam is all 
metered, the tenant pays for what he actually uses in his manufac- 
turing processes. 

And insurance is important. At Bush Terminal the rate is only 
7 cents per hundred in the mutual companies; 15 cents per hundred 
in the line companies. This rate is due to the elimination of every 
possible fire hazard and the installation of every possible safeguard. 



104 BUSINESS ADMINISTRATION 

The Terminal maintains an emergency hospital to care for acci- 
dent cases. It maintains a Bureau of Social Service which develops 
the efficiency and loyalty of all the working people employed by its 
tenants. It conducts an employment department which minimizes 
the labor problem and insures an abundance of both skilled and un- 
skilled labor. It operates lunch rooms, rest rooms, clubs, and other 
employees' benefits which in the aggregate make the Terminal a most 
desirable place of employment and attract the highest class of workers. 
A post-office, express offices and telegraph offices are on the ground. 
An elaborate and efficient city delivery system is operated. Traffic 
experts minimize the cost and speed the handling of all incoming and 
outgoing goods. 

In short, the Terminal management accepts as its duty the opera- 
tion of every service which can be economically performed upon a 
co-operative basis and thus the tenant-manufacturer is free to con- 
centrate his time, energy, talents, and capital upon the money- 
making factors in his own business. Where a manufacturer located 
alone must give thought and vitality to hundreds of matters which 
are in themselves profitless side issues, the manufacturer located in 
the Ideal Industrial City has no such distractons — he simply pays 
rent, and modest rent. 

The Bush Terminal International Exhibit Building is the latest 
extension of Bush Terminal service. It was designed primarily to 
give our 276 tenants and more than 2,000 customers a sales head- 
quarters in the very heart of New York's buying district. With this 
knowledge, we have erected a building unique in commercial history. 
It contains every resource and convenience desired by the buyer who 
visits the greatest marketplace in the world. But it contains more: 
It contains every facility for the out-of-town manufacturer who 
wishes to place his wares before these buyers in a favorable manner 
and at low expense. 

There are exhibition rooms for the display of merchandise. There 
are single offices, suites, deskroom, the services of specially trained 
salesmen, stenographic and clerical help, conference rooms, an 
auditorium (in which, for example, moving pictures of your factory 
and manufacturing processes may be shown to prospective customers). 
There is a bureau of information, a library of American and foreign 
commercial data, and a corps of experts to assist in organizing and 
developing export business. Nothing which will facilitate the selling 
of goods and building of a permanent market has been overlooked. 



PLANT LOCATION 105 

The Bush Terminal International Exhibit Building (in connection 
with Bush Terminal service) solves your problem of an eastern 
and export sales branch. Whether you are ready to put one man here 
or a hundred, we can provide the location, the opportunity, and the 
service to insure that such a branch will be undertaken on the basis 
of absolute efficiency. 

23. STILL ANOTHER EXAMPLE— THE TOLEDO 
FACTORIES BUILDING 1 

Small light manufacturing plants located in rented quarters are 
often seriously handicapped by being compelled for lack of better 
accommodations to occupy old, out-of-date buildings with few of the 
advantages of modern factory buildings. With poorly arranged 
factory space in fire-trap structures and improper lighting, heating, 
and ventilating, their overhead charges are high and consequently 
the cost of production is excessive. Some plants require such a small 
space that the erection of a factory building is not practical, and 
owners of other industries do not care to tie up their capital in factory 
buildings. 

Toledo, Ohio, is a city that has solved the problem of providing 
adequate factory facilities for small industrial companies and has 
solved this problem in an interesting manner. The carrying out of 
the plan adopted has resulted in the erection of a factory building that, 
in addition to being thoroughly modern, is unique in a number of 
particulars, one of the most important of which is the flexibility of 
the interior arrangement so that a tenant can secure the amount 
of space he needs and can acquire additional units of space as the 
growth of his business warrants. 

The movement to erect the factory building originated with the 
Toledo Commerce Club, which, after investigating conditions, found 
that it was difficult to secure suitable space for light manufacturing 
in that city. This lack of accommodations interfered with the estab- 
lishment of new industries there. It checked efforts to induce com- 
panies with plants elsewhere and looking for a new site or a new 
company looking for a favorable location to locate in that city. The 
Commerce Club as an organization was unable to undertake the erec- 
tion of a factory building, but a company known as the Toledo Fac- 
tories Company was organized within the membership of the club, 

1 Adapted by permission from "Modern Factory Building for Small Plants," 
Iron Age, XCV (1915), 188-91. 



106 BUSINESS ADMINISTRATION 

practically all the members being stockholders. To finance the pro- 
ject a $100,000 5 per cent bond issue was authorized. The bonds 
were taken by some of the leading local banks, and $194,000 in 
common stock was sold. While the primary object was to help the 
city, the details of the project were carried out with the idea of making 
it a safe financial investment with a fair turn for the stockholders. 
Earnings have been sufficient to warrant the directors to authorize 
recently the payment of dividends at the rate of 4 per cent per annum 
of the stock. 

[The account of the advantages claimed for the Toledo Factories 
Building is quite similar to the advantages claimed in Selections 21 
and 22, and is therefore omitted.] 

24. EXAMPLES OF CITY ADVERTISING 

A 1 

Why is Philadelphia the best city in the United States for the 
establishment of manufacturing enterprises? Why have more than 
8,000 industrial plants already located in Philadelphia, with new 
enterprises constantly augmenting their number? There are many 
reasons, among which may be cited the following: 

Philadelphia has 267 wharves and docks to accommodate ships. 

Philadelphia has thirty-seven miles of improved water front. 

Philadelphia stevedores can load one hundred 10,000- ton ships 
simultaneously. 

Philadelphia's port charges are cheaper than any other port in 
the country. 

Philadelphia has three great trunk lines connecting its water front 
with the entire country. 

Philadelphia's dockage eliminates the necessity for lighters. 

Philadelphia's unloading plant can handle 6,000 tons in ten hours. 

Philadelphia has a grain elevator which can load 15,000 bushels 
an hour. 

Philadelphia has the most efficient pilot service in the world. 

Philadelphia manufacturers can ship imported goods inland for 
six cents a hundred pounds less than can the manufacturers of New 
York. 

Philadelphia is the only absolutely fresh-water port on the 
Atlantic seaboard, and the water is beneficial to iron-hull ships. 

1 Taken from Philadelphia Y ear-Book (191 7), p. 11. 



PLANT LOCATION 107 

Philadelphia is second only to New York in foreign tonnage. 

Philadelphia has regular lines sailing through the Panama Canal. 

Philadelphia has numerous lines connecting it with Europe. 

Philadelphia imports more leather than any other city in the world. 

Philadelphia makes more textiles for export than any other city 
in the world. 

Philadelphia has a belt-line railroad along the water front specially 
built to facilitate the loading and unloading of ships. 

Philadelphia has behind it one of the greatest coal regions in the 
world. 

Philadelphia has behind it the greatest iror region in the world. 

Philadelphia has behind it some of the greatest oil fields in the 
world. 

Philadelphia exports nearly a billion gallons of oil annually. 

Philadelphia manufactures more locomotives than any other city. 

Philadelphia has cheaper and faster railway connections with the 
South and Southwest than Boston or New York. 

Philadelphia also has substantially cheaper rates for shipments to 
the Mississippi Valley. 

Philadelphia has the greatest tobacco humidors in the country- 
Philadelphia exports 4,000,000 tons of coal annually. 

Philadelphia refines 500,000 tons of raw sugar annually, or one- 
sixth of the entire output of the United States. 

Philadelphia is only 1,946 miles from the Panama Canal. 

Philadelphia piers have sunken railroads to facilitate loading from 
ships. 

Philadelphia has the most efficient export and import storage 
houses in the country. 

Philadelphia has the two biggest shipyards in the country. 

Philadelphia's harbor was improved in 191 5 by the expenditure 
of more than a million and a half dollars. 

Philadelphia's banking institutions have, prompt communication 
with Europe, Asia, and Africa. 

Philadelphia and New York statistics prove that shippers can 
save from $600 to $1,000 on the average cargo by receiving and for- 
warding through Philadelphia rather than New York. 

Skilled labor is plentiful; land reasonable in price; industries are 
encouraged by the city government, civic organizations, and by all 
the citizens of Philadelphia. 



io8 BUSINESS ADMINISTRATION 



B 1 



Here are the reasons given by industrial leaders in the United 
States — among them Charles M. Schwab, Bethlehem Steel Company; 
J. E. Alfred, capitalist; M. M. Upson, secretary of the Raymond 
Concrete Pile Company; B. W. Dudley, president of the Prudential 
Oil Company (all of New York) — why they located plants in Balti- 
more: 

i. "Its geographical position making it the best manufacturing 
and distributing point on the Atlantic Coast." 

2. "The nearness of Baltimore to the coal fields; the low price of 
coal and its good quality." Coal is delivered at Sparrows Point, 
Baltimore, at 20 cents per gross ton less than at Bethlehem or other 
cities similarly situated, with a profitable differential over other 
seaport cities. 

3. "The low freight rate to and from Baltimore by rail." Balti- 
more has a 3 cent per hundred pounds differential under New York 
and Boston to and from the West; a 2 cent per hundred pounds 
differential under Philadelphia. 

4. "The low cost of power — $0,008 per thousand kilowatts for 
electricity; 35 cents per thousand feet for gas, the lowest on the 
Atlantic Seaboard." 

5. "The deep-water channel which permits the largest ships to 
enter port day or night." The channel has a depth of 35 feet from 
ocean to piers. 

6. "The low cost of living in Baltimore and the comforts and con- 
veniences within reach of laboring classes." The labor is permanent, 
as Baltimore has a larger number of individual home owners in the 
laboring classes than any other American city. 

7. "The disposition of the authorities to be reasonable about tax 
assessments and the co-operation of banks and the city officials." 
Machinery and tools are exempt from all taxation. 

The Bethlehem Steel Company, by locating in Baltimore, will 
make a saving on freight rates alone of $800,000 each year. This 
is equal to 5 per cent profit on an investment of $16,000,000. 

Let us figure with you how, by locating your factory in Baltimore, 
you can capitalize its many advantages. If you are interested, a 
special representative will call on you at your factory and analyze 
your specific business and tell you what Baltimore has to offer. 

1 Taken from an advertisement in a business periodical. 



PLANT LOCATION 109 

Write today for book of Baltimore's advantages. 

Move your plant to Baltimore! 

James H. Preston 

Mayor 
Address, Department r 
City Hall, Baltimore 

25. WHAT CITY PLANNING MEANS 1 
I. Definition: 

City planning is good sense and forethought applied to the building 
of cities. 

II. Purpose: 

City planning aims to make a city 



for 



fWork 
Business 
Home Life 

, Social Life 



Convenient 
Economical 
Healthful 
Pleasant 

III. Scope: 

City planning is the science of designing cities 

a) It is not the organization of administrative departments 

b) It is not efficiency in the civil service, or economy in the purchase 

of supplies 

c) It is concerned with construction rather than with operation or 

maintenance 

d) It tells how to do things which, if done wrongly, either could not 

be changed, or could be changed only at great expense 

e) It prevents mistakes which make inevitable other mistakes which 

cannot be corrected 
/) It determines the layout of a city, the location of things, and the 
types and character of permanent structures, so far as these are 
matters of public interest 

IV. Methods: 

a) Spread of ideas; public opinions; expert advice 

b) Constructive public action 

c) Voluntary co-operation 

d) Control of private activity, when necessary and helpful, as for 

example when it 
1. Limits heights of buildings and the proportion of lot areas to be 
built on 

1 Adapted from a pamphlet issued by the Niagara Falls Chamber of 
Commerce. 



HO BUSINESS ADMINISTRATION 

2. Regulates construction of buildings 

3. Establishes zones or districts to be developed in different ways 

4. Supervises the housing of the people 

5. Encourages the platting of the suburban areas in harmony with 

the general plan of the city 

6. Controls the development of privately owned public utilities and 

the location of their works 

With proper city planning no one owning property is permitted to 
develop it as he pleases, unless his pleasure respects the general welfare. 
In yielding a given degree of control to the community, the individual 
citizen is more than repaid by the benefits that come from the harmonious 
development of his town and by protection from the possible whims of his 
neighbors. 

V. Encouragement of Industry: 

City planning aims to promote conditions which are favorable to 
industrial development, and at the same time to prevent the abuses which 
result from mere material prosperity. 

a) It provides: 

1. An industrial district 

2. Reclaimed lowlands convenient to waterways 

3. Improved harbors and deeper channels 

4. Railroad connections and switching facilities without discrimi- 

nation 

b) It reaches out for 

Cheap water, light and power, and makes the town pleasant for 
laborers' homes 

VI. Suburban Development: 

Cities are growing rapidly. The outlying districts offer the chief 
opportunity for city planning, other than the costly tearing down and 
reconstruction of old areas. When the city as a whole is too shortsighted, 
impecunious, or helpless to apply city planning to the suburbs, the task 
sometimes is undertaken by private corporations or associations, with or 
without the sanction or backing of the public authorities. 

The planning of undeveloped and suburban areas may have one or 
more of several objects: 

a) To keep outlying districts in harmony with a central area already 

well planned, as, for instance, in Washington, D.C. 

b) To make the new development superior to a wrongly planned 

central area 

c) To provide beautiful homes for the rich and well-to-do 

d) To depopulate the slums and provide healthful environment for 

the poor 

e) To house the employees of particular factories or works 



PLANT LOCATION ill 

26. THE CITY-PLANNING MOVEMENT 1 

In securing a removal of factories to the outskirts, town planning 
has the opportunity — as already indicated — of putting them where 
they will do least injury to the community. That is to say, in the 
arbitrary creation of a factory district there must be consideration not 
only of transportation opportunities — a feature which it is compara- 
tively easy to control — and of general healthfulness of locality, 
but also of the proposed position in its relation to the existing city. 
The factories should not be put where the prevailing wind will carry 
their smoke into the city, where their location checks the natural 
growth of high-class residence districts, or where the heavy teaming 
incident to their operation is compelled to make use of expensively 
developed avenues. Finally, in large towns more than one industrial 
district should be planned, lest — even with suburban location — 
residential congestion result. 

The present city-planning movement has been preceded, as well 
as accompanied, by not a little thoughtful platting of limited areas, 
done in a comprehensive way by the manufacturers themselves, when 
they have established their plants on the outskirts of cities. Of their 
own initiative, they have sought by such platting to gain for their 
employees, as well as for themselves, the advantages which town 
planning ought to give. For example, Leclaire, Illinois, the town 
built by the N. O. Nelson Manufacturing Company, is characterized 
by "winding roads, bordered with spreading shade trees." Other 
examples are Echota, the town of the Niagara Development Com- 
pany, at Niagara Falls; Coldspring, New York (the Cornell 
Company) ; Gwinn, Michigan (a mining town of the Cleveland-Cliffs 
Iron Company); Plymouth, Massachusetts (tract developed by the 
Plymouth Cordage Company); and Wilmerding and Hopedale. 

In 1909 Los Angeles created by ordinance distinct residential 
and industrial districts, decreeing that certain kinds of business should 
be excluded from the former, even though they had been already 
established in the designated area. This very radical action was 
subsequently upheld by the Supreme Court of the state. Three 
years later the legislature of Maryland passed an act requiring that 
all buildings in a given section of Baltimore be detached. In that 
same year, 191 2, Massachusetts amended its general municipal act 
so as to permit all of its cities and towns except Boston to regulate the 

'Adapted by permission from C. M. Robinson, City Planning, pp. 175-79, 
279-82. (G. P. Putnam's Sons, 1916.) 



112 



BUSINESS ADMINISTRATION 



height, area, location, and use of buildings in any designated part or 
parts of their corporation limits. And the province of Ontario, 
Canada, gave to cities that had a population of 100,000 or more 
authority to control the location of apartment and tenement houses 
and of public garages. 

In 1 9 13 there was a wave of districting legislation. New York 
State authorized the Common Council in the six cities of the second 




Map Showing the Existing Downtown Zones in Boston 1 

Black — Offices and banking. Dotted — Industries and storage. 
Hatched and dotted — Rail and water transportation. 
White — Residences and accessories. 



Compare this with the map of Torrance, 
are there ? 



Just what significant differences 



class, on petition of two-thirds of the owners affected, to establish 
residence districts in which only single or two-family houses may be 
constructed. Minnesota in that year passed an act empowering 
Duluth, Minneapolis, and St. Paul to establish residential and 
industrial districts, on petition of 50 per cent of the property owners 
in the affected section. Any kind of business, and even tenements, 

1 Adapted from The North End, a. report of the City Planning Board of Boston. 



PLANT LOCATION 



113 



apartment houses, and hotels, may be excluded from the residential 
district. Wisconsin authorized its eight cities of 25,000 or more 
population to set aside " exclusive" residential districts. Seattle 
included the possibility of restricted districts in the building code 
adopted by it in July, 19 13. 

In 1 9 14 the legislature of New York amended the Board of Esti- 
mate and Apportionment to " divide the city into districts of such 



UNION FREIGHT- TERMINAL 



Genera! Plan of 

* Ji@frramee 




Fl?uD\of Totrwce Iodustrmr.(Ss. California 



Map Showing the Zones Established in Advance for Torrance, 
Near Los Angeles, California 

number, shape, and area as it may deem best suited" for a regulation 
of " the height and bulk of buildings and the area of yards, courts and 
other open spaces," and it gave to the board permission to make these 
regulations different in different districts. The board was given 
authority also to "regulate and restrict the location of trades and 
industries and the location of buildings designed for specific purposes," 



114 BUSINESS ADMINISTRATION 

and to " divide the city into districts of such number, shape, and area 
as it may deem best suited to carry out" such purpose. 

While it is true that new laws are constantly added and new for- 
ward steps continually taken, it has seemed worth while to run over 
this legislation because it so clearly shows the trend. It seems to 
give assurance that in America districting has come to stay, that it 
will grow in thoroughness, and thus that city planners will have this 
added authority which may be of such value in facilitating the adapta- 
tion of towns and cities to their functions. 

REFERENCES FOR FURTHER STUDY 

Shaw, An Approach to Business Problems, chap, iii and pp. 115-25. 
Jones, The Administration of Industrial Enterprises, chaps, iii and iv. 



CHAPTER III 

THE ADMINISTRATION OF PERSONNEL 

Purposes of this chapter: 

i. To secure a bird's-eye view of modern methods of personnel 
administration. 

2. To appraise these methods in terms of their contribution to 
good output and to right social living. 

3. To see the relationship of personnel administration to the other 
aspects of administration. 



A. Introductory Survey of the Content of the Manager's Relation- 
ship to Personnel 

The manager's administration of his personnel problems is a topic 
which may rightly lay claim to much space in our treatment of mana- 
gerial control. Someone has well said that industry is made up of 
persons working with things and that it is even more important to 
utilize the persons properly than it is the things, since man is the goal 
as well as the chief agency of industrial activity. In this statement, 
it should be observed, two arguments are present, at least by impli- 
cation. One is that attention to personnel problems in modern 
industry is justified as a means of improving human relationships; 
as a means of producing man. The modern worker, so the argu- 
ment runs, spends such a considerable proportion of his waking hours 
in the business plant that as a matter of social upbuilding the plant 
must assume certain obligations which were in a simpler society dis- 
charged by the home, the guild, or the market place. 

No doubt there is merit in this contention. We cannot, how- 
ever, close our eyes to the fact that modern industry is organized 
for profit; and we must remember that we are just now engaged in a 
study of managerial control of modern industry. We turn, therefore, 
to the second argument which is implied in the statement that it is 
highly important to utilize properly the persons who work with things 
in modern business. This second argument is that it pays; that it 
yields gains over and above the costs; and that the manager should 
therefore engage in personnel activities as a business proposition. 

"5 



n6 BUSINESS ADMINISTRATION 

It is our task in this chapter to look into both of these arguments, 
but especially into the latter. It will facilitate our study if there is 
before us from the very start a brief statement of the method we 
shall use. 

i. Since modern management is of necessity specialized, let us 
assume that there exists in the typical business organization a sepa- 
rate department charged with the administration of personnel. This 
is by no means true of all concerns and particularly it is not true of 
small ones. The problems are present, however, even if no separate 
department has been set up, and it will quicken our discussion if we 
free ourselves from attention to details of business organization 
and concentrate upon the problems always at issue, no matter what 
the form of organization may be. We assume, therefore, as a means 
of facilitating discussion, that the manager's administration of per- 
sonnel is carried out through a personnel department. 

2. Since our survey must at the best be a rapid one, it is inexpedi- 
ent to try to master the multitudinous " practical " technical aspects 
of personnel administration. Rather let us confine ourselves mainly 
to an attempt to see the larger problems which are to be solved and 
the materials which are available for their solution. Such a study 
will cause us occasionally to look at various phases of personnel 
practice, but these occasional glimpses will be for purposes of illus- 
tration, or of sampling, rather than for the purpose of mastering 
technique. 

Perhaps the statement of purposes at the opening of the chapter 
might be paraphrased thus: (i) To get an appreciation of the range 
and character of the problems which confront the personnel mana- 
ger and of the kind of an organization which may wisely be set up 
to meet these problems. (2) To see the problems of labor adminis- 
tration (a) in terms of incentive and output and (b) in terms of the 
economic order. (3) To get a broad survey of the apparent trends 
in labor administration and particularly to survey the advances 
being made in scientific methods in this field. (4) To become suffi- 
ciently aware of the ramifications of labor administration to show us 
what fields of study will be useful in this connection in our later 
training for business management. 

Section A (pp. 115-26) of our study will be devoted to a general 
view of the functions performed by the modern personnel department 
and of the functionaries who do the work. The purpose of this section 



THE ADMINISTRATION OF PERSONNEL 1 17 

is that of introducing the student to the subject-matter of the chapter 
in such a way that he may from the beginning think of it as a whole 
and not as a series of isolated sections. Sections B (pp. 127-53) an d 
C (pp. 153-92) view personnel activities in terms of incentive and 
output, thus recognizing the challenge of "does it pay?" Section D 
(pp. 192-226) gives us a glimpse of certain materials which are avail- 
able for the solution of personnel problems. It emphasizes those aids 
which objectify the issues and facilitate scientific approach to the 
problems. Section E (pp. 226-42) discusses the place of the per- 
sonnel department in the business organization as a whole. 

Our first task, then, is an introductory survey of the content of 
the manager's relationship to personnel. 

PROBLEMS 

1. "It is even more necessary carefully to compute the labor require- 
ments and closely to analyze the status of the working force than it is 
to check up the physical materials that go into production." Is this 
an extreme statement of the case? Why or why not? Can one 
determine which is "more necessary" ? 

2. "It very early became evident that exact methods could not be carried 
out successfully in a factory where the personnel was chosen at hap- 
hazard or was constantly changing." Why not ? 

3. A large steel corporation is reported to have advertised recently for 
seven hundred common laborers and to have laid off one thousand in 
another department the same day. How was this possible? How 
could it be avoided ? 

4. One writer has classified "The usual reasons for leaving employment" 

as follows: 

{work 
pay 
personal reasons 

... „ . [business or seasonal fluctuations 
rlaid on for< ,. . ,. 
I [discipline 

Involuntary because [unfitness for work 

(.discharged on account of < , , 

[personal character 

How could a central employment department eliminate or minimize 
any of these ? 

5. "The principal losses to employers from changing employees may be 
expected to fall under some one of the following headings." Supply 
the headings. What ones could a personnel department eliminate? 
What ones could it minimize ? 



Ii8 BUSINESS ADMINISTRATION 

6. "The function of the employment department not only consists of 
selecting and engaging help but also covers the broad field of the 
efficiency of the personnel. Of course there are manifold ways of 
doing this." What are some of them ? 

7. At the Clothcraft Shops about one-fifth of the total number of employees 
are said to come daily into contact with the employment and service 
department. Make a list of the ways in which they come into contact. 

8. "Many firms have included under labor costs expenditures for wages 
only. Scientific study has revealed other labor costs in addition to 
wages." What others? Do these other costs go far to justify a per- 
sonnel department ? 

9. If a plant is located in a town where recreation, health, education, and 
home conditions of the people are adequately cared for, and the workers 
in the plant seem contented and working to their full capacity, is there 
need for a personnel department ? 

10. Which is dealt with in personnel work, the mass or the individual ? 

11. Is personnel work designed to reach skilled labor? Unskilled labor? 
Management ? 

12. "It may be argued that a small industry cannot afford an employment 
department and that even in the larger industry, while it may be needed 
in times of labor scarcity, it is not warranted in times of business 
depression or in slack seasons." Do you agree ? 

13. "In the coming years — now, in fact — men more than things must 
engage the most thoughtful interest of employers." Give reasons for 
and against. 

14. "Employers no longer hire men; they buy labor like any other com- 
modity." What does this mean? Is it true ? 

15. "Machinery plays such an important part in the processes of today 
that, important as labor is, the manager can well afford to give his 
main attention to efficiency of machinery." "In these days of indirect 
costs, it is more than ever necessary to give heed to the labor element." 
With which quotation do you agree ? Why? 

16. Why do employers engage in welfare work ? Is it to furnish incentive 
to labor? Is it on humanitarian grounds? Is it because it pays? 
Are there other possible reasons ? 

17. Should a personnel manager be most proficient in (a) the handling 
of men, or in (b) technical knowledge and plant organization, or in 
(c) something else ? * 

1. ORGANIZATION OF THE PERSONNEL DEPARTMENT 1 

The personnel department represents the employment interests 
of the company and acts for those interests in all affairs that affect 
the people in its employ. Where it is the case that employees them- 

1 Adapted by permission from Ordway Tead and H. C. Metcalf , an unpublished 
manuscript, and also Personnel Administration (McGraw-Hill Book Company, 
Inc., 1920). 



THE ADMINISTRATION OF PERSONNEL 119 

selves are represented either by unions, by shop organizations (e.g., a 
co-operative association or mutual-benefit association) or by both, it 
is the duty of the personnel department to represent the employing 
interests of the company, as distinct from the other interests (produ- 
cing, selling, and financial) in mutual deliberations. 

This statement might seem to indicate an anomalous position of 
dual loyalty and divided interest. This is not the case. A depart- 
ment head's anxiety for the success of his department does not run 
counter to his loyalty to the whole business — rather the contrary. 

The organization, powers, and activities involved in carrying 
out this work are described below. It cannot be too clearly 
urged that, although the several duties are described as if they 
devolved upon separate individuals, this need not necessarily and 
often would not be the case. But since the functions are different 
and distinct, they are here so separated for the purpose of complete 
clearness. The size of the personnel department will naturally depend 
entirely upon the size of the concern. Indeed, in a factory of from 
one to four hundred employees, one or two people can, at least at the 
outset, perform the work involved in a right-functioning personnel 
department. 

1. The personnel manager. — This is an officer of major managerial 
rank who is responsible for the work herein described. 

2. The organization committee. — The organization committee is 
composed of those responsible for the handling of all elements in the 
personnel problem. Its purpose is to draw up and submit plans for 
the development of the whote organization on its distinctly human 
side. 

3. The personnel committee. — The plans of the organization com- 
mittee are submitted to a personnel committee, composed of repre- 
sentatives of the several departments in a concern in order that there 
may be the broadest knowledge and fullest discussion of proposals 
looking to new method and practice in the handling of all personnel 
problems. In this way only is the fullest consent of all forces in a 
business secured for these developments. 

4. The board of personnel directors. — This consists of: (a) the 
director of employment, (b) the director of training, (c) the director 
of research. 

5. The employment division (under the director of employment). 
— The work of this division is most effective where its director has 
entire authority and responsibility in regard to the duties listed. It 



120 BUSINESS ADMINISTRATION 

has sometimes been found wise, however, to begin by giving him in 
some matters only advisory or recommendatory powers. These are 
enlarged into complete authority as soon as this separate department 
devoted to personnel problems proves its capacity to handle them. 
The director should from the start be given as much authority as the 
situation will wisely permit. 

The activities are stated below as they would be when the division 
has attained its full authority: 

a) To develop all available sources, both within and without the 
plant, for possible employees. This involves a thorough knowledge 
and cordial working relationship with a great variety of people and 
institutions which come in contact with people available or capable 
of becoming available for work. The systematic cultivation and 
extension of these resources is indispensable if the concern is to have 
capable workers to select from. 

b) To select employees along lines laid down by the research 
division in the light of thorough knowledge of the requirements of 
the job. 

c) To assist new employees in starting at work so that they will 
be subjected to the minimum of delay in adjustment and in learning 
the duties. 

d) To maintain a steady and competent working force by watch- 
ing for and seeking to eliminate possible causes of dissatisfaction and 
friction; and by hearing and seeking to adjust all grievances among 
employees or between employees and the company, unless there is 
some other organized way of handling these matters, such as a shop 
grievance committee. 

e) To make a periodic study (e.g., every three or six months) of 
the work or work records of all employees so as to have all possible 
facts on which to determine advisability of change in rate of pay or 
in the position held. 

/) To have charge of advancing employees on probation and of 
making promotions and demotions. 

g) To have charge of such transfer of workers between depart- 
ments as will lessen labor turnover and facilitate production. 

h) To lay off and discharge employees when necessary. 

i) To receive and decide all requests for wage increases unless 
there are wage boards which handle these matters. In this event, the 
employment division is represented on the wage boards. 



THE ADMINISTRATION OF PERSONNEL 121 

Thorough knowledge of the pay-roll as a whole and in detail and 
of the financial situation and policies of the concern is an essential 
requisite to the making of these decisions. 

6. The training division (under the director of training). — The 
activities of this division should be carried out with the realization 
that anyone who is earning a living is mature, self-reliant, and respon- 
sible enough to make it unsound to attempt any autocratic methods 
of training. The aim should rather be to help each employee to a 
knowledge of his own ability and latent capacity and of the oppor- 
tunities within the business, and to help him develop himself either 
for those opportunities or for others outside the business where his 
talents may have fullest play. If it is clear that a business offers a 
very limited field for promotion, this attention to outside avenues of 
advancement may very well become a source of strength to the busi- 
ness, since it will attract ambitious people. 

As intimate a knowledge as is possible of the personality and 
working ability of each employee is clearly a prerequisite to this work. 

This division is to outline and administer a comprehensive plan 
of training: 

a) To help employees to train themselves to work more efficiently. 

b) To help them fit themselves for promotion. 

c) To help them fit themselves for other work to which they may 
be transferred. 

d) To direct the training of executives and of all employees who 
instruct other employees. 

e) To compile and bring to the attention of each employee such 
information as to the operation of the plant as will lead to its smooth 
running. 

/) To co-operate in the prevocational training of school children 
and in the training of part-time workers. 

g) To promote and co-operate with efforts to establish public and 
private schools that design to fit children more adequately for industry. 

7. The research division (under the director of research). — The 
research division conducts such study as is necessary to give the 
maximum effectiveness to the work of employment and training. It 
also makes such studies and keeps such records as will render per- 
manent and available the facts about the operation of the plant that 
are vital in their direct or indirect effect upon the people employed. 
It is the constant aim to study the structure of the business and the 



122 BUSINESS ADMINISTRATION 

* 

facts of human nature in order that the workings of the two shall 
be as nearly in harmony as possible. This involves the following 
work: 

a) Thorough study of the actual work in each job both by itself 
and in its relation to the whole organization. A comprehensive job 
analysis includes not only a description of the actual processes but 
also the effect upon the job and the workers of all the human and 
material elements which are involved. (See the nineteen heads of 
The Labor Audit.) A final aspect of job analysis is an organiza- 
tion chart of the concern which it is the duty of the research division 
to formulate and keep corrected to date. Job analysis is the essential 
basis for careful selection of employees. 

b) Selection and statement of standards for new employees (or 
for old employees at new positions); e.g., standards of health, age, 
intelligence, working capacity, etc. A thorough statement of the 
qualifications for each job is a direct outgrowth of the job analysis. 

c) Development of technique to select employees who will meet 
the standards set. This would include study of: (i) methods of 
meeting applicants; (2) form of application blank; (3) additional 
questions to get indications of the applicant's character and per- 
sonality. 

d) The development of clear lines of promotion. If it is the 
policy of the company to promote to certain positions from within, 
the lines of promotion should be made plain to all employees. 

e) The formulation of adequate record systems to show: 
(1) the amount and cost of labor turnover (hiring and firing), giving 
in proper detail the causes by departments; (2) the relation of the 
number of workers and the character of their work to the volume 
of production; (3) the achievement of each worker, together with 
statements of errors, waste, " seconds," breakage, etc. 

/) Keeping in permanent and accessible form the perpetual 
labor audit under the following heads: (1) physical working 
conditions — safety, health; (2) turnover and regularity of employ- 
ment; (3) work analysis; (4) sources of labor supply; (5) methods 
of selection; (6) starting at work; (7) training; (8) labor policies, 
economic beliefs; (9) employers' associations; (10) employees' asso- 
ciations; (11) unions; (12) organized joint relations; (13) labor 
legislation; (14) labor decisions by the courts; (15) labor law 
administration; (16) relation to community interests; (17) form 



THE ADMINISTRATION OF PERSONNEL 123 

and efficiency of management in so far as it constitutes a labor 
problem; (18) amounts and methods of pay; (19) living plans: 
(a) savings; (b) provision against loss from illness; (c) provision 
against loss from accident; (d) provision against loss from unem- 
ployment; (e) pensions; (/) life insurance; (g) opportunities for 
purchasing at fair prices; (h) housing; (i) health; (7) recreation; 
(k) education. 

g) Where determining boards are in operation, the representative 
of the research division is on each determining board by virtue of 
the fact that his division made the initial analysis of the job. 

h) There should be an exhaustive collection of successful experi- 
ments and achievements in the whole field of activities under the per- 
sonnel department. This industry-wide study should look especially 
toward finding remedies for discrepancies or problems that The 
Labor Audit reveals in the plant. 

8. Other activities of the personnel manager. — In aiding the concern 
to meet the human elements in its problem, the personnel manager 
has the following duties: 

a) To keep in touch with the foremost thought and experience of 
the day in regard especially to headings 8-19 of The Labor Audit, 
and to stimulate the management to constant knowledge and advance 
along those lines. 

b) To urge the improvement of the existing forms of organization 
and the adoption of new forms, both in the entire concern and in 
each of its parts; to make clear that any organization is inefficient 
in the long run if it suppresses or conflicts with the fundamental 
characteristics of human nature. 

c) In many concerns questions of safety and health have become 
recognized as so important that an outline of the duties of the per- 
sonnel manager is no longer complete without the statement that in 
addition to the three divisions outlined here some plants will find it 
necessary to establish a safety division and a health division. The 
larger the share of the employees in the management of these di- 
visions, the sounder will be their basis and the more permanent their 
results. 



See also p. 236. The Place of the Personnel Department in the 
Business Organization. 





2. FUNCTIONS OF THE 

PERSONNEL 

Personnel 

Composed of the Direc- 

Object of Department: To Create an Effi- 


EMPLOYMENT STAFF 

Manager 
Interviewer 
Stenographers 
Filing Clerk 
Job Analysis and 
Grievance Man 


MEDICAL AND SURGI- 
CAL STAFF 
First Aid Chief and Two 

Assistants 
Directing Physician 
Surgeon 
Sp ecialists 


SAFETY AND SANITA- 
TION STAFF 
Safety Engineer 
Sanitary Inspector 
Stenographer 


Proper selection by 

a) Careful interview 

b) Study of past record 

c) Physical examination 

d) Knowledge of job analysis 

Instructions to new 

employees > 
o) Introduction 

b) Rules and Policies 

c) Location and use of First 


General Health 
II. Committee Service 
i. Sanitation 
2. Shop 
III. Community 

Co-operate with civic 
bodies 
Physical examination of ap- 
plicants 
Periodical examination of de- 
fectives 


Accident reduction by 
fl) Education 

b) Safeguarding hazards 

c) Committees 
Inspections 

d) Investigation of all acci- 
dents 



Aid 

d) Location of main build- 
ing and shops 

e) Locate conveniences 

/) Badges and Locker keys 

Interview all leaving 
employees 

a) To approve discharge 

J) To check up foreman's 
reason 

c) To insure impartial hear- 
ing 

Keep detailed turnover 
records 

a) To aid turnover control 

b) To verify inability to pro- 
mote 

c) To detect adverse home 
conditions 

d) To rectify absenteeism, 
tardiness or grievances 

e) To aid detection of sick- 
ness or accidents 

Knowledge of Sources 
Knowledge of Plant needs 
Knowledge of hours of work 
Knowledge of wages 
Knowledge of work condi- 
tions 
Transfers and Promotions 
Keep adequate individual 

records 
Furnish state or federal rec- 
ords 



Periodical examination of em- 
ployees exposed to extra 
hazards 

Advise Employment Bureau 
in placement of defectives 

Treatment of accident cases 

Treatment of medical cases 

Vaccination and Inoculation 
as prevention against epi- 
demics 

Investigation of absence 

Furnish Employment Bureau 
with data on employees 
leaving on account of ill 
health 

Keep adequate examination 
and treatment records 

Administer fatigue rules 

District sanitation 

Plant sanitation 

Medical advice and assist- 
ance to families 

Health lectures and printed 
matter to employees 

Special district control in 
epidemics 

Constant educational work in 
general health 



Regular Plant inspection 
by 

a) Safety Engineer 

b) Members of Safety Com- 
mittee 



Supervision of Safety 

a) Drinking water supply 

b) Lighting 

c) Heating 

d) Ventilation 

e) Toilet and Locker rooms 

f) Janitor service 

g) General sanitary condi- 
tions 

Report all accidents to In- 
surance Company 

Co-operate with Employees 
and Medical Bureaus in 
shortening periods of dis- 
ability 

Facilitate compensation pay- 
ments 

Keep adequate records 

Reduction of occupational 
disease hazards. General 
supervision of working con- 
ditions from safety stand- 
point 

Co-operate with Fire Dept 



1 Prepared by C. H. Fenstermacher for Personnel, I (1920), 1, 4-5, 8-9. 
scope of personnel work in a modern industrial plant. 



PERSONNEL DEPARTMENT 1 

MANAGER 

Committee 

tors of Each Bureau 

cient, Healthy, Stable Body of Employees 



EDUCATION AND 

TRAINING 

Staff 

Instructor 

Editor 

Purpose: Training and de- 
velopment of the work- 
ers 



RESEARCH STAFF 
Special 
Investigators 



SERVICE STAFF 
Assistant Personnel 

Superintendent 
Recreation Director 
Supt. of Property 
Social worker 
Stenographer 



Prepare Dept. Manuals 

Bulletin board messages 

Follow up on employee serv- 
ice record 

[ndividual assistance 

Specialized health instruc- 
tions 

Build Library 

Selection of current maga- 
zine articles, for distribu- 
tion 

House Organs 

Hand Book 

Literary and Educational 

, Clubs 

Instruction for Shop control 

Co-operation with local edu- 
cational organizations 

Class work 

High Schools 

Colleges 

Y.M.C.A. 

(Unions in apprenticeship 

i courses 

Co-operate with others in 
getting across to men, 
aims and purposes of each 
bureau 

Noon Day _ and Evening 
mass meetings 

Motion Pictures 

Special courses for Refining 
Groups, Messengers, Cleri- 

j cal, Mechanical and Tech- 
nical foremen 

Musical features 

Choruses, Orchestras, Bands 

Kindergarten 

Conduct Suggestion Box 



Job analysis studies 
Standard wage rate studies 
Cost of living studies 
Chart lines of promotion 
Investigate grievance causes 
Departmental courses assem- 
bled for study 



Housing Problems 

a) Company houses 

b) Rented houses as to rate 
and service given 

c) Rooming houses 



Community Service 

a) Advance Legislation 

b) Public recreation 

c) Public health and sanita- 
tion 

d) Public education 



Legal Aid 

a) Notary Public 

b) Investments 

c) Public Libraries 



Plant or Company Service 

a) Develop Women's Clubs 
and groups 

b) Develop Men's Clubs 

c) Develop Shop Committees 

d) Assist in directing em- 
ployees' civic activities, 
viz: Social Moral Recrea- 
tional, and educational 

Supervise recreation 

Employees' stores 

Lunchrooms 

Garden activities 

Supervision of Group Insur- 
ance 

Supervision of Thrift Cam- 
paigns 



This selection is worthy of careful study. It gives a comprehensive view of the 



126 



BUSINESS ADMINISTRATION 



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THE ADMINISTRATION OF PERSONNEL 127 

B. Personnel Administration in Terms of Incentive and Output: 
Good Physical Conditions and Competent Human Machines 

The events of recent years have brought out into clear relief the 
fact that it is important to have men work together effectively; that 
output, abundant, well-balanced output, is of vital interest to society. 
Now this is not a new truth. Output always has been and always 
will be essential to the onward march of society; output, not solely 
of material goods like shoes and potatoes, but also of services such as 
those of the artist or the physician; output directed not alone to the 
gratification of what we call, loosely enough, our material wants, but ' 
directed as well to the development of all the finer qualities of heart 
and mind. Output is important to the progress of society as a 
whole. Properly controlled, it is important to the progress of every 
class of society. It is, furthermore, a sine qua non of business success, 
barring what we like to think are abnormal and exceptional cases 
such as predatory or monopolistic businesses. 

Notwithstanding all this, no fact is more patent today than the 
ineffectiveness of businesses in this very realm of output. Who is 
responsible for this ineffectiveness? Part of the responsibility rests 
upon labor with its feelings of enmity toward capital, its suspicions 
and fears and distrust, its lack of initiative, its mental laziness, its lack 
of vision concerning the real issues of the case, its limitation of out- 
put, its occasional surrender to poor leadership. So also part of the 
responsibility rests upon capital and management with their feeling 
of enmity toward labor, their suspicions and fears and distrusts, 
their lack of initiative, their mental laziness, their lack of- vision con- 
cerning the real issues of the case, their limitation of output, their 
occasional surrender to poor leadership. As between the two parties, 
the greater responsibility rests with capital and management, for 
after all, they hold the directing power. It is their function to 
make researches into the problem; to plan effective organization; 
to develop appropriate incentives; to serve society as responsible 
stewards. 

And, unfortunately, part of the responsibility rests with our 
whole modern organization of society. In our impersonal knitting 
together of specialists, it is easy for distrust and fear and suspicion 
to arise; easy for each party to believe that it contributes more to 
the common weal and receives less return than does the other party; 
easy for beliefs to solidify into prejudices. We have done little to 
combat these prejudices. We have done little to instruct the modern 



128 BUSINESS ADMINISTRATION 

specialists concerning their place and duties in society. There is 
almost no such instruction on how our society is put together in our 
public-school system, which is our main reliance in such matters. 
As for instruction within the walls of industry, foreman- training 
courses are mainly courses in production technique, and other courses 
which deal with more than production technique are in their infancy. 
We have hardly made a beginning of getting men to see how they 
work together, and surely this vision must precede their working 
together effectively. 

Then, too, the organization of our society upon a competitive, 
gain-spirit basis, valuable in the main, leads to short-sighted policies 
and to confusion of issues. It is not infrequently true that gains to 
individuals flow from limitation of output and from other acts harm- 
ful to society. It is not infrequently true that short-sighted quest 
for gain leads to disregard of long-run human values. These seem 
to be penalties attached to our pecuniary organization of society. 
True, they are penalties which can be lightened or even abolished 
by effective social control, but we have, not unnaturally, developed 
a healthy suspicion of the effectiveness of our instruments of social 
control. Too commonly, social attitudes are manufactured; too 
commonly, supervision is stupid, negligent, or even harmful; too com- 
monly, public service is prostituted to private gain. 

There is always a mournful interest in attempting to decide 
which is blacker, the pot or the kettle, but that alone is a futile per- 
formance. Our survey of the responsibility for inadequate output 
was undertaken, not to place blame, but to see, in perspective, the 
task of the personnel manager who realizes that his function is that 
of aiding in getting men to work together effectively. He must 
understand the causes of inadequate output. He must set himself 
to the determination of the conditions of good output and then to 
the realization of those conditions, so far as in him lies. 

There are, of course, many possible ways of stating the conditions 
precedent and prerequisite to good output, and they obviously vary 
from case to case. Assuming as a type case a manufacturing and 
selling business, there is submitted the following tentative formula- 
tion of these conditions. There should be: 

i. Good physical location and good physical plant and equip- 
ment, both from the point of view of mechanical processes and from 
the point of view of their relationship to the workers. 



THE ADMINISTRATION OF PERSONNEL 129 

2. Good " human machines" both physically and mentally. This, 
of course, includes necessary training, and it applies to management 
as truly as to workers. 

3. Good development of "the will to do" in these human 
machines — which makes them far more than machines. 

4. Good organization and administration, or control, or effective 
bringing together of persons and the things with which persons work. 

5. Good social environment, including in that term, not merely 
social attitudes and government, but also all economic and social 
institutions — the church, the school, the place of amusement, the 
trade union, the banking system, and a legion of others with which 
the manager must work. 

It is the point of view of this chapter that the personnel manager, 
maintaining always his responsibility for broad social values, must 
justify his position in the business firm by his contribution to output. 
The five conditions precedent to good output which have just been 
mentioned are accordingly matters in which he has a vital concern. 
The first two of these conditions are considered in the present section. 
The third is taken up in section C under the caption " Personnel 
administration in terms of incentive and output: the will to do" 
(see p. 153). The fourth is treated (with particular reference to the 
personnel department) in section E "Organization and administra- 
tion of the personnel department" (see p. 226). The fifth does not 
receive formal treatment except in respect to its relationship to develop- 
ing "the will to do" and to the spirit of personnel administration. 

Space permits only a "sampling" method of treatment of the 
two (good physical conditions and competent "human machines") 
conditions precedent to good output which are taken up in this 
section. The student's mind should range out beyond the samples 
given. He should also be alert to see in these selections matters 
which bear upon problems considered in more detail in later sections. 

PROBLEMS 

1. "The present methods of factory management do not secure a high 
degree of labor efficiency." Why not ? 

2. What are some of the factors within an industrial plant which serve 
to reduce output ? Which of these can the manager eliminate or 
minimize ? How ? 

3. It is said that employers supported the safety-first movement because 
of pecuniary motives. Explain how this would be possible. 



130 BUSINESS ADMINISTRATION 

4. "It doesn't pay the management to care for physical health of workers 
and to prevent accidents. It is cheaper to 'scrap' the unfit and get 
new ones." Draw up a table showing factors of cost for and against 
this position. 

5. "Safety engineering is a misnomer. Propaganda is a better term." 
What is the point to this statement ? 

6. The most remarkable development of safety engineering would not 
entirely eliminate accidents. Who should bear the cost of these 
unpreventable accidents ? Why ? 

7. "The prevention and cure of illness is essentially a community and 
not an industrial problem." Grant this. Does it relieve the manager 
of responsibility ? 

8. "The progressive employer will be ahead of both legislation and cur- 
rent practice in safeguarding workers against disease and accident." 
Why ? Will it pay ? If you think so, show precisely how. 

9. Draw up a statement of the function of social insurance. Should the 
manager be interested in such matters ? If so, why and how ? 

10. Show wherein the personnel manager is interested, as a business man, 

in the issues raised in questions 7, 8, and 9. 
n. "Technical skill and mental ability do not necessarily coincide with 

perfect health." Does this fact discredit the physical examination? 

12. "Output is in direct ratio to the length of the working day." Of 
course, this is not true, without limit. What are the limits? Will 
they vary from industry to industry ? 

13. "Talk of losses due to fatigue in modern industry is badly overdone. 
High specialization and the use of automatic machinery cause output 
to keep up, no matter if the workers are greatly fatigued." Comment. 

14. " Rest periods are a very useful way of reducing accidents in an industry 
where the strain is great." Why ? 

15. What are the principal means used to reduce physical and nervous 
strain in industry? Are they universally used? Can you suggest 
any that might be but are not now used ? 

16. "The essentials of daylight illumination, as summarized by Dr. Scheres- 
chewsky, are (1) the amount of light admitted to the interior 
should be as large as possible. (2) The light should reach the center 
of the room. (3) The distribution of the light upon the working 
planes should be as uniform as possible. (4) The light should fall 
upon working planes from a proper direction. (5) The walls and 
trim of the room should be of such color and surface as to absorb but 
little of the light, white being the preferable color. (6) Manufacturing 
and other equipment should be so disposed as to avoid casting 
extensive local shadows." Wherein is the personnel manager interested 
in illumination problems ? 



THE ADMINISTRATION OF PERSONNEL 131 

17. "It is at least questionable whether the employer has any right to 
follow the employee home from the factory and intrude on his domestic 
and social life, nor should there be any need in a city of size and decent 
government." Discuss. 

18. "Poor housing conditions are factors in impairing the health and morale 
of the worker, in lowering efficiency, in breeding discontent, in retard- 
ing production, and in increasing labor turnover." Do you agree? 
Can the personnel manager do anything to help the situation ? 

19. "It is inevitable that labor should retard any effort to develop human 
machinery which is made without its consent and its own tangible 
reward in view." Do you agree ? What can the manager do about it ? 

20. "All this welfare work is nonsense. If the manager would only stop 
it all and add its former cost to wages, both industry and worker and 
society would gain." Comment. 

21. "Problems involved in securing and holding an efficient working force 
reveal the futility of leaving their execution to detached foremen. 
They include: (1) mobilizing the sources of labor supply within and 
without the plant; (2) analyzing and classifying the requirements of 
the jobs of the entire plant; (3) selecting and placing applicants for 
work according to their physical, mental, and temperamental fitness for 
the specific job; (4) inducting and 'following up' the new employee 
until adjustment is complete; (5) retaining and developing the old 
employee." Discuss the relative abilities of the foreman and the per- 
sonnel manager to deal with these matters. 

22. What are some of the difficulties of newspaper advertising for help 
from the point of view of (a) the worker, (b) the manager ? 

23. There has developed among manufacturers considerable opposition to 
having a United States employment service in the United States 
Department of Labor. Can this be because such a service could not be 
made worth while ? 

24. Confining your attention to the employment and placement activities 
of the personnel department, what items of cost can such a depart- 
ment reduce ? What instrumentalities or technical devices will it use 
in the process ? 

25. Viewing the matter only as related to his costs, what arguments are 
there for a manager's conducting "general education" classes within 
his plant? For co-operating with public schools in continuation- 
school work? For conducting classes in sewing, drawing, personal 
hygiene, and domestic science ? 

26. Viewing the matter only as related to his costs, has the manager any 
interest in the public school system of his community? If so, is his 
interest confined to vocational education ? 

27. Would it be well (a) for society (b) for the manager, to have all technical 
training for all positions cared for in public schools ? 



132 BUSINESS ADMINISTRATION 

4. SOME CAUSES OF INEFFICIENCY IN MODERN 

INDUSTRY 1 

The causes of inefficiency may be divided into three classes: 
The first are those causes which are chargeable primarily to the 
employer, the second those which are chargeable primarily to the 
workmen, and the third those which are chargeable primarily to our 
political and industrial system. 

Those causes of inefficiency which are chargeable primarily to 
the employer may, in turn, be divided into two classes. Those of 
the first class arise from a lack of knowledge. They can be remedied 
by showing the management the possibilities of better methods. 
Those of the second class arise out of moral defects on the part of 
the employer, and will require more than a change in the system of 
management, or full information of the conditions of the plant in 
order to eliminate them. 

The first and most prolific source of inefficiency is mental laziness. 
Most of us dislike to think. While a good many of us will devote a 
spare hour now and then to the consideration of some interesting sub- 
ject, no man will, if he can avoid it, devote two hours a day, not to 
mention eight hours a day, to the task of devising and comparing 
methods of work. That kind of thing is entirely too strenuous to 
suit the average officer of administration. In the average plant, 
each officer places upon the shoulders of his underlings the burden of 
detail for which he himself ought to be responsible. 

A second source of inefficiency is a dislike on the part of most 
managers to employ a considerable executive staff to direct the 
efforts of their workmen. The management balks at such a staff, 
and claims that "non-productive" labor is a necessary evil if you 
have to employ it, and an unnecessary evil if you can do without it. 

A third fault of management is timidity. Capital seems to be 
ruled by fear quite as often as by judgment. Men dislike to risk 
their money in something which they feel is not absolutely sure to 
bring adequate returns. 

This brings us to a fourth fault of management, which is lack of 
foresight. The management, in performing the work of today, fails 
to make allowance for the needs of next week, or the growth of next 
year. Plants grow in haphazard fashion. Equipment is added with- 
out making plans for the future. No attempt is made to insure that 

1 Taken from F. E. Cardullo, "Industrial Administration and Scientific Man- 
agement" in Machinery, XVIII (1912), 931-35. 



THE ADMINISTRATION OF PERSONNEL 133 

there will always be a corps of trained workmen and a staff of able 
foremen. The lack of definite and far-reaching plans for future 
work is not felt at the time that such plans should be made, but is 
felt later. 

A fifth fault of management is one which may best be described 
as "mental inertia." Managers tend to follow methods which have 
been satisfactory in the past, but which changing conditions have 
made unsatisfactory for present requirements. Whenever a new 
invention of any importance is introduced into a shop, the conditions 
of work are greatly altered. The introduction of high-speed steel is 
a case in point. When the time required for machining work is cut 
down to a third of that formerly required, the amount of crane 
service for a given number of machines is trebled. The foundry and 
forge shops must be made very much larger in order to furnish the 
stock required by the machine-shop. The amount of storage room 
required for stock and for finished product is greatly increased. The 
relative importance of different items of cost is radically altered, and 
the nature of the problems of administration is greatly changed. 
Notwithstanding these changes, we will find that in most cases the 
management will attempt to get along with the least possible change 
in equipment, and in methods of work and administration. Many 
men resist change simply because it is change, in spite of the fact 
that the change may be desirable. 

A sixth, and probably one of the greatest of all causes of ineffi- 
ciency, is the fact that the management very seldom makes a careful 
study of the industry. In the few cases where a careful study is 
made, it is usually done for the purpose of improving the materials 
used or the quality of the output, or increasing the amount of work 
turned out by the use of a given method. 

It is of equal or even greater importance that the methods them- 
selves should receive the same careful study. Probably the best 
example of a scientific study of methods of manufacture is the work 
of Mr. Taylor on the art of cutting metals. It is probable that a 
similar study of methods would result in equally important develop- 
ments in other lines of industry. Such studies are not made for three 
reasons. In the first place, managers do not realize the need of such 
studies nor the advances which are possible. In the second place 
very few men are capable of making such studies. In the third place, 
inertia opposes the changes which would result from such studies, and 
timidity hesitates to expend the money necessary to carry them out. 



134 BUSINESS ADMINISTRATION 

A seventh source of inefficiency in many industrial plants is the 
system of wage payment adopted. It would be hard to devise wage 
systems better calculated to limit efficiency than the two which are 
in most common use, namely, the day-wage plan, and the piece- 
work plan with frequent cuts. Under the day-work plan, the man 
receives no reward for his efficiency, he is instead punished for ineffi- 
ciency. This is a method which is fundamentally wrong, and only 
to be employed when no other method is possible. 

When a piece-work plan is adopted, the management usually 
knows very little about the possibilities of the work. If the manage- 
ment fixes what the men think to be a reasonable piece rate, the men 
will soon so increase their output that they will be making exorbitant 
wages. The management will then cut the piece rate, and after the 
men have experienced a series of cuts as a result of successive increases 
in efficiency, they will discover that the management does not propose 
to pay them more than a certain amount of money, and will work 
just hard enough to secure a trifle less than the maximum amount 
they can secure without experiencing a cut. 

An eighth cause of inefficiency is one which is happily becoming 
less frequent. It is a disposition on the part of some employers to 
regard their workmen as being of a lower order of humanity than 
themselves. I have talked with such men on more than one occasion. 
Among their associates they were highly regarded for their kindness 
of heart, but I have heard them speak of their workmen as " beasts" 
and " ignorant brutes." No man who regards his employees in that 
light can be persuaded to adopt scientific management nor can he 
bring the efficiency of his plant to a high standard, because such 
feelings will unconsciously affect his attitude in dealing with his 
employees, arouse their antagonism, and destroy that feeling of 
co-operation which is the essential basis of high efficiency. 

The last source of inefficiency of which I will speak is avarice on 
the part of the management. Avarice reduces wages, cuts piece 
rates, purchases inferior materials and equipment, employs unskilled 
labor, skimps on supplies, and makes unjust exactions of its employees. 
Avarice refuses to expend money for the collection of information, for 
increasing the facilities of work, and for improving the efficiency of 
administration. Avarice hampers the administrative staff at every 
point. 

I have not by any means exhausted the list of causes of ineffi- 
ciency which arise from faults of the management. It would be as 



THE ADMINISTRATION OF PERSONNEL 135 

easy to name a hundred as to name nine, but the task is not agree- 
able. I have endeavored merely to point out the fact that such 
faults exist, that they can be remedied, and that before scientific 
management can be applied to an industry they must be remedied. 
While most of the causes which lead to inefficiency are chargeable 
to bad management, I would not have it inferred that the work- 
men are free from blame in the matter. 

The first source of inefficiency chargeable to the workmen is their 
disinclination to work at any other than their natural pace. If a 
man is allowed to work as he pleases, he will soon settle down into 
a certain pace which suits his temperament and nervous organization, 
and will keep to that pace without very much variation from day to day. 

A second source of inefficiency is lack of ambition. While most 
men will be stimulated by a proper reward, there are some classes of 
labor which cannot be reached in this way. Some workmen do not 
accomplish as much or as good work when well paid as they do when 
poorly paid. In certain sections of the South contractors find that 
when negro laborers are paid 75 cents a day they will work a full 
veek, when paid $1 a day they will lay off one day in the week, and 
vhen paid $1 . 50 a day they will lay off half the time. The reason 
is that these men are not ambitious. It is needless to remark, how- 
ever, that the average artisan is not of that character. He is ambi- 
tious and invariably responds to a suitable reward, unless he believes 
that in so doing he is acting against the best interests of himself or 
his fellow- workmen. 

A third source of inefficiency lies in the fact that the workman 
does not like to think any more than the superintendent, the foreman, 
the manager, or the board of directors. He prefers to work without 
thinking when it is possible. Few men are physically lazy, but 
nearly all men are mentally lazy. The only way that a man can 
work without thinking is to do the job the way in which he or some- 
one else has done it before. 

A fourth, and possibly the most prolific, source of inefficiency is 
the belief held by many workmen, and unfortunately taught by 
many union officials, that in doing efficient work men are displacing 
other workmen and lowering wages. 

A fifth source of inefficiency chargeable to workmen is a feeling of 
enmity against their employers. A great many workmen are unable 
to see the community of interest between the workman and the 
employer. Some workmen act as if they believed that the two 



136 BUSINESS ADMINISTRATION 

were at war, and that anything done to injure the employer was a 
benefit to labor. Until all feeling of enmity between capital and 
labor is replaced by a knowledge of mutual need and appreciation 
of mutual interest and a desire for mutual success, not only efficiency 
but also prosperity must suffer. 

Those sources of inefficiency which arise out of the imperfections 
of our political and industrial system are just as important as are 
those due to faults of management or of workmen. Unlike the 
latter, however, it is impossible for either the management or the 
workmen to correct the faults we are about to consider. 1 



See also p. 164. The Fears of Labor and of Capital. 



5. PHYSICAL CONDITIONS OF WORK AND ACCIDENT 

PREVENTION 2 

[It was said in the statement introductory to this section that 
one condition precedent to good output is good physical location 
and good physical plant and equipment, both from the point of 
view of mechanical processes and from the point of view of their 
relationship to the workers. We shall in our discussion assume, 
as self-evident without argument, the validity of this statement as 
far as technology is concerned. An interesting phase of the relation- 
ship of the technological processes to the worker is shown in this 
reading on accident prevention and in the following one on preven- 
tion of occupational diseases. Every reader will realize that both 
of these selections apply also to that condition precedent to good 
output which we have called "good human machines, both physically 
and mentally."] 

The physical environment of employes is a determining factor 
of health, happiness and efficiency. Good ventilation, lighting and 
sanitary conditions contribute directly to the employe's physical 
well-being and the ease with which he can work. Fire protection 
and accident prevention make his labor power more secure. 
Attractive surroundings afford relief from the strain of monotonous 

^his part of the discussion is omitted. It deals with the wastes and ineffi- 
ciencies, the risks and uncertainties connected with our industrial society. — 
Editor. 

2 Adapted by permission from L. K. Frankel and Alexander Fleisher, The 
Human Factor in Industry, pp. 135-40. (The Macmillan Company, 1920.) 



THE ADMINISTRATION OF PERSONNEL 137 

or fast work. To this end a button factory in Rochester, New York, 
provides phonograph music intermittently throughout its various 
departments. In the machine shops where noise prohibits music, 
potted plants are arranged in convenient places between the 
machines. Window boxes, vines, trees, and shrubs decorate the 
exterior of many factory buildings, which are designed as artistically 
as private suburban homes. Efforts to beautify the industrial 
environment of the employe are, it is true, of less importance than 
the endeavor to prevent accidents, occupational disease and fire, and 
to provide adequate ventilation, lighting, and sanitation. Never- 
theless, since the employe spends at least one third of his day in 
the workshop, it is desirable that his surroundings should not only 
make for efficiency, but stimulate his aesthetic and creative faculties. 

Growth of accident prevention movement. — No phase of labor 
maintenance has grown so rapidly as the movement to prevent 
industrial accidents. In 1906 the first exhibit of safety appliances 
in this country was held under the auspices of the New York Institute 
for Social Service. This led to the organization of the American 
Museum of Safety (1907). In 19 12 a small group of engineers met 
in Milwaukee and launched the National Safety Council, which has 
taken the lead in the war against accidents. In four years' time it 
included 15,400 representatives from 3,293 firms, covering 4,500,000 
workmen. 

There are a number of reasons for this remarkable interest. Not 
until recently have United States statistics of accidents in industry 
and their sequelae been available. These have formed the basis of 
active propaganda and legislative action. Notwithstanding this, it 
is estimated that 35,000 workmen are still killed annually — one every 
12 minutes — and probably 400,000 receive injuries sufficiently serious 
to cause them to lose time from their work. In Pennsylvania alone 
in 1916 industrial accidents caused lost time equivalent to 3,025,371 
working days and $7,535,059 in wages. 

This loss wae formerly borne entirely by the injured workman, 
occasionally assisted by fellow-workers and the employer. Work- 
men's compensation laws enacted in most of the States have divided 
the loss by charging a percentage to the employer. These laws have 
not only transferred the cost of accidents from employe to employer, 
but by requiring systematic reporting of accidents have furnished 
necessary data as to their extent and seriousness. These in turn 
have led to the safety campaigns. 



138 BUSINESS ADMINISTRATION 

Possibility of preventing accidents. — Experience has shown that 
at least 50 per cent of the industrial accidents are preventable. 
Twenty-two of the foremost industrial concerns of the United States 
report an average reduction of 54 per cent in yearly accidents after 
the introduction of organized safety work. The International Har- 
vester Company, the Neenah Paper Company, the Illinois Steel 
Company, and the Milwaukee Coke and Gas Company each reported 
a reduction of more than 80 per cent. In eighteen months the Port 
Huron Engine and Thresher Company, in a plant employing between 
three and four hundred people, reduced accidents 56 per cent and 
cut down compensation costs. 

Safety devices. — To accomplish these results many ingenious 
safety devices have been developed to protect workmen. Glass 
hoods catch the fine steel splinters from the emery wheel; goggles 
cover the metal grinder's eyes; " congress shoes" with steel plated 
toes protect the molder from a scalding should he spill the hot metal 
he is carrying; " safety nets" catch the falling workmen, tools, or 
materials in construction work; automatically locking doors protect 
elevator shafts in office building and factory, etc. 

Importance of personal equation in' the reduction of accidents. — 
Mechanical appliances play an essential but comparatively small 
part in accident prevention. By far the larger number of accidents 
is dependent on the person or persons involved. This has been 
demonstrated repeatedly by studies of causes of accidents and of 
methods of preventing them. The experience of the Illinois Steel 
Company, one of the pioneer companies in safety work, has led them 
to evaluate the different methods of attacking the accident problem. 
Only 17J per cent of the total reduction in accidents is attributed to 
the introduction of mechanical appliances, and another 8 per cent 
to improved lighting and cleanliness. Educating by means of lectures, 
or bulletins, or instruction while at work, was held accountable for 
30 per cent of the reduction and the organization of Safety Commit- 
tees for 20 per cent. This experience is typical. 

6. PREVENTION OF OCCUPATIONAL DISEASE 1 

Prevalence of industrial health hazards. — Nowhere has there been 
sufficient appreciation of the extent and variety of occupational 
disease. Dr. Hayhurst, after an extensive study, states that "from 

1 Taken by permission from L. K. Frankel and Alexander Fleisher, The 
Human Factor in Industry, pp. 142-44. (The Macmillan Company, 1920.) 



THE ADMINISTRATION OF PERSONNEL 139 

one fourth to one third of the medical afflictions of trades persons 
are due in the whole or in great part, to industrial health hazards." 
Processes grouped according to hazards. — In his study of Ohio 
industries Dr. Hay hurst classifies the hazardous industries as: 

(1) Those using poisons as a chief hazard. 

(2) Dusty industries. 

(3) Those in which fatigue and inactivity are the chief hazards. 

(4) Those in which heat, cold, moisture, or dampness predominate. 

(5) Those in which there is more than usual liability to con- 
tracting communicable diseases. 

(6) Industries having miscellaneous hazards not included above. 
The largest class is probably the dusty industries. It has been 

estimated that approximately 5,600,000, or 17 per cent of 
American wage earners of both sexes, work under conditions more or 
less injurious to health because of atmospheric impurities caused by 
dust, fumes, or gases. Professor Winslow has listed some 54 trades 
in which fine particles of bone, hair, metal, and mineral vegetable 
materials form a dust which it is more or less dangerous to breathe. 
This by no means covers all the industries, processes, and occupations 
which give rise to dust; almost every manufacturing process may 
expose workers to this hazard unless precautions are taken. 

Preventative measures. — A large amount of the unnecessary sick- 
nesses and premature deaths may be prevented with comparatively 
little effort or cost on the part of the employer. Many occupational 
diseases may be prevented by: 

(1) Securing the scientific ventilation of workrooms, especially 
by the installation of efficient local exhausts which remove dust at 
points of generation. In some industries, such as in smelting and 
refining, fountain-pen-point manufacturing, jewelry, etc., the dust 
created is valuable, and it has been found profitable to recover the 
valuable material from the collected dust by means of a patented 
electrical precipitation process. 

(2) Securing cleanliness by providing ample washing or bath- 
ing facilities. Some plants provide separate lockers for street cloth- 
ing and working clothing, so arranged that the worker must remove 
his working clothes, hang them up to dry or place them in the lockers, 
and must then pass through the shower room before he can get to 
his locker containing street clothing. 

(3) Wearing of proper protective clothing, viz., respirators and 
goggles in dusty processes which cannot be taken care of by exhaust 



140 BUSINESS ADMINISTRATION 

ventilation, as in sand-blasting and emery-wheel grinding; boots 
and gloves in wet and chemical processes; special shoes for foundry 
workers; helmets for welders; water-cooled furnace doors for hot- 
process workers; overalls, aprons, caps, etc. 

(4) Shortening the working hours (and, therefore, the period 
of exposure), allowing rest or "spell" periods in fatiguing and exhaust- 
ing work. 

(5) Requiring physical examinations at entrance, to weed out 
those unfit for work and to place others where they are best suited 
physically; and periodically to ascertain whether workers are 
suffering from the effects of their occupations so that changes may 
be made and treatment or necessary advice given. 

(6) Providing medical care, including first aid and necessary 
subsequent treatment. 

(7) Giving health instruction and safety education. 

(8) Proper layout of plant and good housekeeping so that 
workers in one process are not unnecessarily exposed to the hazards 
of another adjacent process. 

(9) Sanitation of plant to prevent the spreading of communi- 
cable diseases. This includes adequate and proper toilet facilities, 
sanitary bubbling fountains, individual towels, spittoons, etc. 

7. THE MAINTENANCE OF PHYSICAL FITNESS 1 

Various ways are now known by which fatigue can be reduced 
without decreasing the output and even in some cases with an increase 
of it. When fatigue is caused by work inside factories, it is obviously 
controlled more easily than when caused by the conditions of living 
of the workers outside. 

Introducing recess periods. — One of the common methods of 
reducing fatigue is by introducing recess or resting periods during a 
working spell. During such periods, which, in order to be effective, 
must be obligatory and not discretionary on the part of the workers, 
they should have an opportunity to rest, relax, move about, and 
engage in other simple recreation. A little food or a cup of tea or 
cocoa taken at such a time is often remarkably restorative. A very 
striking instance of the benefits of resting periods has recently been 
published. "Two officers at the front recently, for a friendly wager, 
competed in making equal lengths of a certain trench, each with an 

1 Taken from Reprint 482, United States Public Health Service, pp. 5-11. 
(Government Printing Office, 1918.) 



THE ADMINISTRATION OF PERSONNEL 141 

equal squad of men. One let his men work as they pleased, but as 
hard as possible. The other divided his men into three sets to work 
in rotation, each set digging their hardest for five minutes and resting 
for ten, till their spell of labor came again. The latter team won 
easily." 

Introducing variety into work. — Much of the modern industrial 
work consists of a constant and rapid repetition of the same movement. 
A woman worker in one of our munition factories was recently 
observed to handle during her day's work 24,000 pieces of a shell 
fuse and put them through a special process. From seven o'clock 
in the morning until twelve and from one until six she sat at her 
machine and fed it with the succession of brass pieces. The occa- 
sional introduction of a little variety into her work by training her to 
some alternative process might easily have diminished her fatigue 
without diminishing the number of finished pieces. 

Adjusting the speed. — The capacities of different workers vary 
greatly. In order to secure uniformity in the work of a squad, 
where a single motor operates a number of machines, the speed of 
the motor must be adjusted to the average pace. It may be advan- 
tageous to transfer to another job an especially fast or slow person. 
It is of the utmost importance that each member of the squad should 
be able to work with the same rhythm and that the speed of operation 
should be adjusted to this rhythm. Fatigue is least when the speed 
is in consonance with the worker's customary rhythm, and the out- 
put may be twice as great as with a speed a little slower or even 
faster than this. The worker's speed, however, depends not merely 
on the adjustment of mechanical appliances, but is also often increased 
by a well-planned system of incentives, which may consist of piece 
rates or bonuses, or the making of the work itself more interesting 
and attractive. 

Omitting unnecessary motions. — The pieces which the worker has 
to handle should be so placed with reference to height and distance 
from his hands that he is obliged to make no awkward, unrhythmical, 
and unnecessary motions or excessive muscular exertions in handling 
them. His work can thus be done with the least possible waste of 
energy and time. 

Providing adjustable seats. — Where workers are obliged to sit 
instead of stand at their work, the seats should not be of uniform 
heights, but should be adjusted to the individual worker, with backs 
of such shape and position as best to fit and support the worker's 



142 BUSINESS ADMINISTRATION 

back. Where the worker's feet cannot reach the floor, foot rests 
should be provided. 

Ventilation of workrooms. — The ventilation of workrooms is an 
important aid to efficiency and should conform to the principles of 
ventilation now accepted. The recent investigation of ventilation 
has demonstrated that excessive heat and humidity should be avoided 
so far as possible and that air should be kept in motion. When the 
worker is in a hot room, and especially when heat and humidity are 
combined, his bodily temperature rises, often several degrees, and he 
is put into a feverish state. While movement of the air will not cool 
the air, it will cool the skin and hence will keep down the bodily 
temperature to the healthful level. If possible, windows should be 
wide open; but where this is not possible and wherever even with 
open windows the heat of the workrooms rises above 68°, forced 
drafts or electric fans should be used to keep the air in motion. It is 
astonishing how easily a comfortable and refreshing bodily condition 
may be maintained by the use of electric fans. Air currents should 
not, however, be too strong. Bodily discomfort is caused by exces- 
sive drafts, and a gentle movement of air is the most effective. Uni- 
formity in the play of air on the skin is undesirable; an oscillating 
electric fan or a frequent change in the rate of the forced drafts gives 
the best results. 

Sanitary conditions within factories. — As accessory but none the 
less important means by which fatigue may be lessened and the 
efficiency of workers increased, there may be mentioned certain 
general sanitary conditions within factories: 

i. Adequate lighting, with the light properly distributed and yet 
sufficiently concentrated on the work in hand to prevent eye strain. 

2. An exhaust system to remove deleterious fumes and dust. 

3. Abundant drinking water, cool but not ice cold, within easy 
reach of the worker. 

4. Attractive, quiet rest rooms, especially for women, in which 
in times of need tired workers may find relief. 

5. Lunchrooms or canteens, where a hot lunch of nourishing food, 
selected according to a scientific dietary and well cooked, may be 
purchased at cost prices and eaten amid attractive surroundings free 
from the influence of the saloon. 

6. Clean, well-ventilated modern toilets. 

7. Washing facilities, with abundant soap and clean towels, and 
especially shower baths, where the hot, sweaty, begrimed worker 
may become cool and clean before leaving the plant. 



THE ADMINISTRATION OF PERSONNEL 143 

Alternating day and night work. — The industrial urgencies of the 
war have caused many factories to run both day and night, and have 
thus increased greatly the total amount of night work performed. 
Man is not naturally a nocturnal animal, and under our present social 
arrangements night work must always be regarded as inadvisable on 
physiological grounds. Lack of sleep produces fatigue. The day 
sleep of night workers is likely to be curtailed, and in the long run 
night work is likely to be detrimental to health. This is probably 
more true of women than of men. Where night work is unavoid- 
able, fatigue can to some extent be avoided by allowing the workers 
to alternate at intervals between day and night, the periods to be 
not less than one month in duration. Frequent changes of habits 
may be deleterious to health. 

Adjusting hours of work. — A very obvious way to reduce fatigue 
is by adjusting the number of daily hours of labor. The British 
Health of Munition Workers Committee has found that it is a mis- 
take to recommend a uniform day for all kinds of work, that the most 
profitable duration of the working period varies considerably with 
the nature of the occupation, and that women and boys, even when 
engaged in moderate and light types of work, are unable to stand as 
long hours as men. 

The exact relationship between length of day and quantity of 
output is not yet fully investigated for all conditions, but the great 
preponderance of evidence favors a reasonably short working day, 
even in the interests of the industries themselves. 

Avoiding overtime. — Arguments that favor the short working day 
apply directly to the question of overtime. If the usual day's work 
is such as just to stop short of undue fatigue, overtime means over- 
work. It is, of course, sometimes necessary, in order to complete a 
contract within a required time, to call on the workers to expend the 
greater effort required. It is, however, a dangerous expedient and 
a particularly insidious way of diminishing a worker's efficiency. 
Overtime work is apt to result in an increased amount of spoiled 
work and in lessened output and increased absences on subsequent 
days, and because of this and also in view of the increased rate of 
wages that must usually be paid, overtime is not as profitable as is 
often supposed. It should be resorted to only in times of exceptional 
emergency, and even then not for many days in succession. 

Omitting Sunday work. — The same principle holds for the duration 
of weekly labor. It is generally acknowledged by those who have 
studied the question most carefully that all workers should have 



144 BUSINESS ADMINISTRATION 

one day's rest in seven. At the beginning of the war the amount of 
Sunday work in the industries of the world was greatly increased. 
After little more than a year the British Health of Munition Workers 
Committee reported as follows: 

.... The evidence' before the committee has led them strongly 
to hold that if the maximum output is to be secured and maintained 
for any length of time, a weekly period of rest must be allowed. 
Except for quite short periods, continuous work, in their view, is a pro- 
found mistake and does not pay — 'output is not increased. On economic 
and social grounds alike, this weekly period of rest is best provided on 
Sunday. 

Sanitary conditions outside factories. — Fatigue resulting from the 
work inside the plant will appear sooner and be a more serious hin- 
drance to output if the worker is not in a sound condition of body and 
mind when he comes to his task. Anything which an employer can 
do outside the plant to promote bodily health and vigor and mental 
contentment is in the long run profitable. It aids in securing a 
higher class of workers, greater loyalty to the company, a lessened 
labor turnover, greater skill, and greater general efficiency. Modern 
housing, attractive home surroundings, opportunities for healthful 
recreation, club facilities — whatever will keep workers away from 
the saloons and other places deleterious to health — are all safeguards 
against industrial fatigue. 

See also p. 196. How Industrial Fatigue May Be Detected. 



8. PHYSICAL EXAMINATION OF WORKERS 1 

We are, of course, well aware of the specific reasons for the intro- 
duction of the physical examination of workers in this country. 
The enactment of legislation for the compensation of workmen for 
injuries has rendered such examination advisable for the purpose of 
determining the physical condition of workmen upon entering 
employment, so that unjust claims for accidental injuries might be 
avoided, and the hazard to fellow-employees, arising from physical 
defects in workers, reduced. 

1 Taken from Reprint 234 from the Public Health Reports (November 20, 
1914). By J. W. Schereschewsky, surgeon, United States Public Health Service. 
(Government Printing Office, 1914.) 



THE ADMINISTRATION OF PERSONNEL 145 

Begun on this basis, we are rapidly coming to the realization of 
the great value of such medical supervision in a larger sense. As a 
general proposition such medical supervision should have for its 
objects the following points: 

1. The control of communicable diseases. — It would seem a matter 
of simple justice that the worker should be protected from exposure 
to infection from co-workers suffering from communicable diseases. 
[Patrons also should be protected.] 

2. The detection of incipient defects and diseases. — Many indi- 
viduals have their efficiency much impaired because they are suffer- 
ing from some easily correctible defect, the existence of which was 
unsuspected by them. Others are suffering from diseases, such as 
pulmonary tuberculosis, in an incipient condition which, if neglected, 
would make such advances as to preclude subsequent recovery. 
Medical supervision creates an opportunity for detecting such defects 
and diseases before the damage wrought is irreparable and of advising 
the worker of the steps which should be taken for their improvement 
or correction. 

3. Adaptation of the work to the physical condition of the worker. — 
It is evident that some classes of work require certain physical quali- 
fications or the absence of certain physical defects or diseases. It is 
obvious that persons suffering from hernia should not work at occu- 
pations which require the lifting of heavy objects, persons suffering 
from nephritis should not engage in occupations involving great 
fluctuations in temperature or exposure to cold and dampness, nor 
should persons suffering from cardiac disease be placed in situations 
where physical exertion is required, or where a sudden vertigo may 
endanger the individual or his co-workers. 

4. Advice to the worker. — The great opportunity which medical 
supervision affords to advise workers concerning their physical con- 
dition is an advantage which cannot be overestimated. The helpful 
interest thus displayed on the part of the employer toward the 
physical condition of workers awakens that spirit of co-operation on 
their part which is necessary to the maintenance of "safe" industrial 
conditions. Such, at least, has been the experience of plants in which 
medical supervision has been put in operation. 

5. Record of the physical condition. — For proper medical super- 
vision it is essential that careful records of the physical condition of 
workers be kept. In the first place, a record of the physical exami- 
nation serves, on the one hand, to safeguard against unjust claims 



I46 BUSINESS ADMINISTRATION 

for compensation in the case of injuries, while, on the other, a record 
of physical fitness will help to substantiate just claims for such 
injuries. In the second, such records constitute most valuable data 
for studying the average physique and the condition of the health 
of workers in any industry. 

6. Education of the workers. — We are familiar with the excellent 
work already accomplished in the prevention of accidents by means 
of the education of workers. A similar campaign in teaching them 
how to keep well should have like effects in reducing the number of 
cases of illness. 

7. The prevention of occupational diseases. — Systematic medical 
supervision is a most excellent agent to prevent the occurrence of 
occupational diseases among workers. When such diseases are 
found in a plant, the first cases will be detected by the medical 
supervision, so that the sanitary defects responsible for them may be 
readily corrected. The supervision would serve also as a constant 
check upon the efficiency of the methods introduced to prevent the 
occurrence of occupational diseases. 

It is evident from the foregoing that the scheme of medical 
supervision contemplated in this paper is extensive and would entail 
considerable expense to put in operation. The question which 
inevitably arises is, "Will it pay?" The answer must be unhesi- 
tatingly in the affirmative. The experience of all plants in which 
such systems have been put in operation is so satisfactory that no 
doubt has arisen in the minds of their officers that medical supervision 
does pay in increased efficiency of the working force, greater content 
of the workers, greater co-operation between employers and employed, 
and in greatly diminished loss of time and suffering from preventable 
disease. 

See also p. 195. Strength Tests in Industry. 



9. SELECTION AND PLACEMENT 1 

The ability and knowledge to select competently come only after 
considerable preliminary work has been gone through. They 
involve — 

(a) Information in advance as to vacancies: This is one of the 
worst features of modern conditions. Workmen must be educated 

1 Taken by permission from N. D. Hubbell, "The Organization and Scope of 
the Employment Department" in Bulletin 227 (U.S. Department of Labor, 1917). 



THE ADMINISTRATION OF PERSONNEL 147 

to give sufficient notice of leaving and foremen must notify the 
employment department immediately when such notice is given, 
thus allowing as much time as possible for securing people to fill 
the positions. This education of the workman involves, in addition 
to making him realize the fairness of it — (1) a system for paying off 
in full, when they leave, those who give sufficient notice; (2) having 
an understanding that leaving without notice must be counted 
against his record should he ever want a reference from the com- 
pany; (3) checking up a previous record of employment to see if he 
has quit without notice; and (4) it also involves, on the part of the 
employer, giving notice when letting a man out, except in case of dis- 
charge for insubordination, malicious conduct, and the like. 

(6) A thorough knowledge of what material is available: This 
includes, in addition to applications on the shelf, a knowledge of con- 
ditions of the labor market in the locality, and any strikes, lay-offs, 
and other conditions affecting it. 

(c) A close personal contact with foremen: This is part of the 
missionary work. It is simply getting around the shop as often as 
time permits and keeping in touch with the foremen regarding their 
wants and what is available. 

{d) A general working knowledge of all operations performed: 
From personal observation and talks with the foremen a general 
knowledge of the work can be acquired. 

(e) Standard specifications for all classes of help used: Standard 
specifications would be an outgrowth of contact with the foreman 
and would involve a knowledge of the operations and the correspond- 
ing kinds of help preferred. These should be reduced to writing and 
approved by the foreman and employment manager. 

(J) Knowledge of rates and earnings: It is necessary for the 
employment manager to have a thorough knowledge of rates paid 
for all classes of work done. This should include day rates and a 
general knowledge of average earnings on piecework in the plant 
and as much of this information as can be gained pertaining to 
other plants in the locality. 

(g) Investigation of applicant's record: Proper co-operation on 
the part of employment managers on the matter of references will 
enable them to weed out many of the undesirables. It is largely a 
matter of the employment department having sufficient data to give 
an intelligent and comprehensive record of the man. 



148 BUSINESS ADMINISTRATION 

(h) Physical examination of applicants: Many of the larger and 
more progressive concerns are now insisting upon a physical exami- 
nation of new employees before starting work. In many cases it is 
the outcome of rigid accident compensation laws, but from the 
purely business standpoint doctors' examinations are a good propo- 
sition. They are so common now that very few applicants object 
to them. A comprehensive employment department is not complete 
without them. 

(i) Character analysis: Opinions of employment men vary as to 
the value of scientific selection and character analysis, but there is 
without doubt something in the science which would be of value to 
most employment men. It is for each to use as much of the science 
as his experience justifies. 

(j) Testing out applicant for certain work: Many concerns are 
finding it advantageous in some cases to take the applicant to the 
department and give him a superficial try-out. This is of special 
value in the case of operators for special and automatic machines 
where a minute or two at the machine will prove whether or not the 
applicant is familiar with it. However, this should be discouraged 
rather than encouraged. 

This will also include taking the applicant into the factory to see 
working conditions in certain special cases. 

Introduce new employees. — At the present time there is not enough 
attention paid to introducing new employees into the organization 
properly. If an applicant has been accepted it is worth while to 
start at once to make him feel at home. The impressions gained 
during the first few days stay with him and a little personal interest 
at the start helps him over the critical period. Some one from the 
employment office should take him to his department when he starts, 
and the introduction should include: 

(a) Introduction to foreman and fellow employees: If he is not 
already acquainted with the foreman he should be introduced to him 
and arrangements should be made for him to be made acquainted 
with fellow employees. 

(b) Explain rules and policies of the company: The most satis- 
factory way of explaining rules and policies is to give the new man a 
brief, concise booklet, and supplement it with a verbal emphasis on 
important points. This gives him an opportunity to study them 
over at leisure, and not rely on memory to carry all the details. 

(c) Explain location and use of hospital: The new employee 
should be shown the location of the factory medical department and 



THE ADMINISTRATION OF PERSONNEL 149 

impressed with the necessity of going at once to the hospital in case 
of any injury, no matter how slight. 

(d) Point out physical surroundings: General layout of build- 
ings, offices, stock and tool rooms, lunch room, exits, etc., should be 
pointed out. 

(e) Point out location of conveniences: This should include wash 
room, lockers or coat rooms, and toilets to be used in the department 
to which he is assigned. 

Follow up performance of employees. — By taking up this func- 
tion the employment manager is taking up employment work in the 
broader sense. This phase of the work is, nevertheless, important, 
because by following up the performance of all employees, especially 
new ones, attention is called to "deadwood," round pegs in square 
holes, and real live material within the organization. It also acts 
as a check on the judgment of the man doing the hiring and he 
should benefit by the experience. This follow up should cover — 

(a) General conduct. 

(b) Average earnings. 

(c) Lateness and accidents. 

(d) Health and accidents. 

(e) Efficiency rating or periodic certifications by foreman cover- 

ing at least — 

1. Workmanship. 

2. Reliability. 

3. Willingness. 

4. Attitude. 

5. Industry. 

See also p. 197. Job Analysis. 

p. 144. Physical Examination of Workers. 

p. 209. Army Intelligence Tests and Trade Tests. 



10. EDUCATION AND TRAINING 

A 1 

Among the tendencies that merit special attention is that of 
establishing schools throughout the country to maintain direct con- 
tact with the actual workers in their places of employment. An 
example of this kind is furnished by the part-time and evening classes 
in the Southern textile industry. The Bradford-Durfee Textile 

1 Taken by permission from The Industrial Information Service (Septem- 
ber 30, 1920). 



150 BUSINESS ADMINISTRATION 

School at Fall River, Mass., which is rearranging its quarters and 
increasing its staff to accommodate 600 boys, represents the same 
tendency. Since the passage of the Smith-Hughes Act, which gives 
federal aid to industrial education on a part-time basis and other- 
wise, the whole movement has received a distinct impetus. 

But employers have not waited for public assistance to promote 
the training of their employees. They have gone at the job indi- 
vidually through the establishment of apprentice systems and the 
like: the school maintained by the General Electric Company is a 
case in point. Or they have acted collectively, for instance through 
the National Association of Corporation Schools which has recently 
announced an enlargement of its activities. 

The war greatly quickened the movement. The experience with 
vestibule schools demonstrated in many establishments the economy 
of systematic training for new employees. Practically every branch of 
industry has multiplied training departments; from shipyards, mills, 
factories and mercantile establishments comes the same story of 
educational effort. In the retail field alone there are three schools 
whose object is to train teachers for educational work. 

Here and there private industry is actively promoting education 
of an advanced character. Thus the Goodyear Tire and Rubber 
Company has founded a university, housed in an expensive building 
and conducted by a teaching staff of 200 instructors. Another 
example is the technical institute of the Ford Motor Company, to 
which students from all over the country will be admitted. 

Another phase of the movement is the increasing endeavor to 
provide adequate training for foremen — the technical and "humane" 
education of these key men in industry. In the same breath may 
be mentioned the courses for industrial nurses and physicians offered 
at some of the colleges and universities, and the many opportunities, 
both public and private, for instruction to potential and actual 
employment managers and higher executives. Indeed, the training 
of higher executives may be said to have become a new department 
in teaching. 

Public school departments in several states are more and more 
linking up their work with industrial needs. Finally there is the 
establishment by labor unions of colleges and schools designed to 
help those of their members who feel the lack of secondary and 
university training. In all these efforts lies the hope not alone of 
greater efficiency but of a spirit of understanding and co-operation. 



THE ADMINISTRATION OF PERSONNEL 151 

B 1 

Methods of training. — As has already been pointed out, training 
has to go on somehow in practically all shops. It always has gone on — 
in some form it always will. At different times and in different con- 
cerns training has been carried on in a great many different ways, 
but all of these ways, or methods of securing training, can be put 
into one of two classes, which we can for convenience call training 
by absorption and training by intention. 

Training by absorption. — Where this method is used there are no 
definite arrangements made for training. New men "pick up" their 
work as they can. They get what information they can from others 
who are on the same sort of jobs. Perhaps they find a "good fellow" 
at the next machine and "get next " to him at the noon hour. " They 
use their eyes and their mouths." In this way they gradually get 
so that they can do some sort of a job or else get fired. If they are 
able to stay on the job they are finally absorbed into the working 
force — hence the name. 

A common modification of this method is where a shop allows 
piece workers to take on learners as "helpers." As an example, 
suppose a weaver in a cotton mill is running a certain number of 
looms, say, for illustration, eight. His wife's cousin makes a deal 
with him to come in as a "helper." Perhaps the "helper" pays for 
the privilege. With the aid of this "helper" the weaver can run, 
say, ten looms instead of the eight, so he makes more money. After 
a while the "helper" thinks that he can run a few looms himself, 
and when the mill is short on weavers he gets a chance to try it on 
his own hook. In this way he gradually becomes some sort of a 
weaver. What training he got, good or bad, he did not get through 
any training plan operated by the mill. "Officially" the mill had 
nothing to do with it. It did not even know "officially" that the 
man was in training. 

Another illustration of how this method works in practice is 
when a man "steals his trade." For example, he goes to a machine 
shop where they work on a lathe job. In a few hours or half a day 
the foreman finds out that the man knows nothing about his job and 
fires him. However, he has found out something about the job. 
He goes to another concern, represents himself as a lathe hand and 
gets a job on the strength of it. This time he may last a few days. 

1 Taken by permission from C. R. Allen, The Instructor, the Man, and the Job, 
pp. 11-16. (J. B. Lippincott Company, 1919.) 



152 BUSINESS ADMINISTRATION 

He works the same game again with another shop. Because he knows 
a little more he may last a little longer. By keeping this game up 
he may finally become able to do some sort of a lathe job. 

As in the other cases, what he got he got by himself, with what 
help he could get from other men whom he " pumped" as he could, 
and who were not supposed to help him, but were supposed to work 
on their own jobs. 

Training by intention. — This method differs from training by 
absorption in that there is some recognized plan for training new 
men. Somebody is expected to train them either as all of his job 
or as a part of his job. Some illustrations of how training by " inten- 
tion " is carried out in practice would be an apprenticeship scheme; 
a definite recognition of helpers as a part of the working force; a 
definite responsibility placed upon foremen to train new men as well 
as to get out production. Definite training departments, whose sole 
responsibility is to train, and trade schools, would illustrate training 
by intention carried to the extreme point of development. In all of 
these cases somebody is paid to train the new man. It is intended 
that he shall be trained — hence the name. 

Some ways by which intentional training is carried out in practice. — 
Of course intentional training is carried out in all sorts of ways in 
practice, and the methods of "breaking-in help" that are usually 
followed in such schemes for intentional training are well known to 
shop men, but for purposes of discussion some of the more common 
methods are given here. 

(i) The foreman, in addition to his responsibility for getting out 
the product, is made responsible for the training of new men. He 
personally instructs them, keeps track of them, checks them up. 
Many foremen have been very successful in training men themselves 
and, in some cases, have developed most excellent methods. 

(2) A competent workman (an "old hand") is put in charge of 
one or more learners (helpers, apprentices, green men). In the 
old days, under the apprenticeship method, this was the standard 
plan. Training is, of course, carried on in the regular shop as in the 
first case. 

(3) Certain men are given the exclusive job of training. These 
men are paid to do nothing else. Men are broken in by them — it is 
their job and nobody else is supposed to have anything to do with 
the man until he is trained. Such men are sometimes called instruct- 



THE ADMINISTRATION OF PERSONNEL 153 

« 

ing foremen to distinguish their job from that of production foremen. 
Under this plan training is also carried on in the shop. 

(4) Training is not carried on in the regular shop but in special 
"training shops," so that men do not get into the regular work until 
they have been thoroughly trained. Under good conditions the 
training is given with the same equipment as that of the production 
shops, and the same sort of work is carried on. A modification of 
this plan is the trade school shop as it has been developed in some 
parts of the country. 

(5) Distinct training departments are established with distinct 
heads and instructing staffs. So long as men are in training they 
are under the authority of the training department and not under 
the production foremen. When properly trained in the training 
department they are turned over to the production department 
as competent men. Training may be given in special shops or in 
the regular production shops. 

Of course, there are many modifications of these five forms. For 
example, a foreman will often start a distinct training shop for ele- 
mentary training. This separate training shop may be in some corner 
of the production shop. After a little preliminary breaking-in in the 
special "shop," the man's training will be completed in the regular 
shop. The five examples given will, however, serve as a basis for 
discussion. 

C. Personnel Administration in Terms of Incentive and Output: 

the Will to Do 

In this section, the emphasis is upon incentives, upon the develop- 
ment of the will to do. In giving this emphasis, it would be simple, 
and as futile as simple, to make lists of the various kinds of incen- 
tives available for modern industry — financial, non-financial, direct, 
indirect, present, deferred, and all the rest of them — and then make 
corresponding lists of the technical devices, which could be utilized 
in calling these incentives into operation. With the technique we 
are not greatly concerned in such a rapid survey as the one in which 
we are engaged. We seek to get a sense of perspective concerning 
the use of technique rather than skill in its manipulations. 

It will aid in getting this perspective to see the stages through 
which "incentive and output" have passed in the history of Western 
industrialism. For convenience in discussion let us speak of three 



154 BUSINESS ADMINISTRATION 

stages: first, the stage of simple industry, beginning in the medieval 
period and extending to the time of the industrial revolution, that is 
to say, to the latter part of the eighteenth century; second, the 
transitional stage, comprising the first hundred years or first phase of 
the industrial revolution; and third, the current stage, covering the 
last generation or two of our history which is sometimes called the 
second phase of the Industrial Revolution. 

Our earlier picture of the stage of simple industry, where two or 
three apprentices worked for the master and where an established 
procedure, drawn on the basis of time spent and achievement, pro- 
vided for promotion from apprentice to journeyman and from jour- 
neyman to master, provides a setting for an appreciation of the 
application of incentives in that simple society. 

It was easy and natural for the worker of that time to develop a 
pride in workmanship — easy for him to gratify his "creative instinct." 
He owned and cared for the tools with which he worked and had an 
owning craftsman's pride in those tools. He owned the product, or 
at the very least had intimate personal relationships with the owner, 
and there was accordingly both pride of ownership and a direct 
visible connection between the amount of output and the amount of 
reward. He worked through various stages of production in an 
intimate way so that he saw his work actually developing under his 
hands and could feel that he was expressing his personality through 
his product. The product was typically disposed of to friends and 
acquaintances so that reputation and standing in the community 
attached to his workmanship. He saw an almost automatic method 
of rising to the direction of industry so that hope and expectation 
and realization were closely connected, if indeed they were not one. 
His position in society was certain and readily understood. And 
finally custom's firm grip upon his mind kept him free from soul- 
torturing questionings concerning his status. The picture had its 
darker side as well. Mental horizons were narrow; mental furniture 
was meager and bare. The brighter side is here presented not to 
portray a state to which we could tolerate return, but to give us a 
comparative basis for the study of present-day incentives. 

What we have called the transitional stage (running, say, from 
1750 to i860 or 1880) began with the Industrial Revolution, a 
term that connotes modern specialized, impersonal, large-scale, 
technological industry. For generations prior to the opening of this 
transitional stage the market had been widening, the demand for out- 



THE ADMINISTRATION OF PERSONNEL 155 

put had been growing. Partly as a result of this enlarging market 
there came forth the power-driven machine and a tremendous 
increase of productive capacity. But this increased productive 
capacity did not sate the market. Oddly enough the market 
expanded still more rapidly, so rapidly indeed that it outran pro- 
duction. In part, this was due to the influence of machine industry 
itself, as expressed in the steamship, the railroad, and later the 
telegraph and the telephone in enlarging the area of the market. In 
part, it was due to the fact that this transitional period marked the 
opening up of great stretches of the world to the use of man — South 
America, Africa, Australia, and our own Middle West, the greatest 
consuming market the world has ever known. In part it was due 
to the most rapid increase of population the world has known, a 
population, too, with an ever-rising standard of consumption. 

For all these reasons the transitional period (1 750-1880) is 
marked by an ever-increasing hunger for output, for output at almost 
any cost, and, as always, our industrial structure was adjusted to the 
situation. It so happened that the deliberate and conscious part of 
that adjustment was worked out largely on the technological side as 
contrasted with the personnel side of industry. The reasons for this 
are easy to see. The results of an improvement in processing were 
visible and tangible and the manager could measure the gain at 
once in dollars, whereas attention to personnel meant results far 
less tangible and measurable. Moreover, the sciences basic to 
improvement in technology had had considerable development, 
whereas the social sciences basic to personnel work are of a later 
time. Again, except for the period culminating in the ephemeral 
organizations of 1835 and 1836, labor was docile and not inclined to 
force attention to the terms and conditions attached to its contribu- 
tion to productivity. It is not surprising therefore that in this 
transitional period the hunger for output led to the development of 
schools of technology, such as schools of engineering, mining, agri- 
culture, and to the establishment of the so-called private business 
colleges concerned with the clerical techniques of administration 
such as bookkeeping, penmanship and stenography, rather than to 
the study of intelligent handling of personnel. 

But this does not mean that industrial and social forces affecting 
personnel had been inoperative. Without management being aware 
of it, tremendous changes had occurred, changes whose consequences 
were to be felt most seriously in the later period. In general terms, 



156 BUSINESS ADMINISTRATION 

through default of real attention to the problem, wage had been 
allowed to become the chief, almost the sole, incentive for the worker. 
Pride in workmanship and ability to gratify the creative instinct had 
waned. No longer owning the instruments of work, he no longer had 
a craftsman's pride in them, and shortsighted management provided 
no substitutes. No longer owning the product, he no longer had a 
pride of ownership and except for the piece work (and we know how 
the piece worker fared in rate cutting) the connection between out- 
put and reward was not close. Working now mainly in detailed 
specialized operations and no longer working with simple tools, he 
could not see the work developing under his hands and could not 
feel that he was expressing his personality through his product. No 
longer disposing of his product in a personal way to a local group, 
his community standing became that of an impersonal factory hand. 
No longer in a simple society where his status was largely fixed by 
custom and where he saw without reflection his contribution to social 
weal, his pride of responsible position was weakened, and neither 
management nor society saw the wisdom of restoring it. Of all the 
incentives of the earlier period, wage and wage alone grew in impor- 
tance, and it is, speaking accurately, a technical device rather than 
an incentive. 

And, unfortunately (unfortunately because the experience gives 
a false sense of accomplishment and security to many present-day 
managers) wage, as the prime incentive, seemed to secure satisfac- 
tory results. This was only in the seeming. The truth is that the 
mental attitudes of masses of people changed but slowly under the 
conditions of that time. The traditions of simple industry still 
ruled. Men still had pride in work. There still clung to men's 
minds the individualistic theory of abundant opportunity to rise, a 
theory nourished by the existence of the frontier and by rapidly 
expanding industry. Furthermore, although the grip of custom on 
men's minds had been loosened, its place had been taken by a natural- 
rights or natural-order philosophy which induced an optimistic outlook 
upon the workings of competitive industrialism. The transitional 
period was one of increased output, not because wage was an 
entirely satisfactory incentive, but because the loss of conditions 
which provided other incentives had not been fully realized. Social 
attitudes had not kept pace with rapidly changing industry. 

And now we come to the current phase of the history of output 
and incentive — the period of the last two generations. Gradually 



THE ADMINISTRATION OF PERSONNEL 157 

the relationship between productive capacity and the absorbing 
capacity of the market shifted. Partly because of the great produc- 
tive gains flowing from improved technology in an industrial regime 
in which incentive, though greatly changed, had not yet materially 
weakened; partly because of a checking of the rate of increase of 
population; partly because the new regions of the world were becom- 
ing fairly well exploited, the rate of increase of productive capacity 
began to outrun the rate of increase of the market. The time is not 
difficult to locate historically. It was heralded by a series of events. 
Since markets must be eagerly searched for, the "orthodox" system 
of distribution — manufacturers to wholesaler to retailer to consumer 
— which was so satisfactory when the market was seeking the pro- 
ducer, had its hold challenged by devices aimed at enabling the pro- 
ducer to strengthen his grip upon the consumer, and the "commercial 
revolution," with its mail-order houses, its national advertising, its 
chain stores, and its direct selling, is now upon us. The trust move- 
ment, aimed partly at economies of production but primarily at con- 
trol of distribution, came into being. The scientific management 
movement sought lower costs of production through increased and 
better application of technology to industry, through increased 
specialization in management, through better location of individual 
responsibility and through better methods of wage payment (notice 
the implication that all was not well with the wage incentive). 
Nations drifted into imperialism and finally into war in the struggle 
for markets. 

In this hurly-burly of changing industrial conditions one thing 
stands out clearly for our purposes. The tightening of markets did 
not mean that the producer could reduce his output. On the con- 
trary, because of large-scale production and the presence of enormous 
overhead costs, he sought means of increasing his output, but it 
was now imperative that this output should be at decreased cost. 

The developments in the field of incentives paralleling this new 
attention to output have been striking. As much as forty years ago 
there had clearly emerged, for those who cared to see, a strong suspi- 
cion, shared by both workers and management, that all was not well 
with wage as a sole incentive. Towne and Taylor, who sensed many 
things ahead of their time, saw the situation. It is no accident that 
one of Taylor's early contributions concerned itself with methods of 
wage payment and that he sought, at least, a wage which was "psycho- 
logically correct." Others in the management group saw it also, but 



158 BUSINESS ADMINISTRATION 

few so clearly. In a bewildered, trial-and-error way they tinkered 
with other devices — with profit sharing, with welfare work, with this 
and that miscellaneous practice — and their tinkering was a confes- 
sion of the inadequacy of the wage incentive acting alone or largely 
alone. The "will to do" that meant increased output at lowered 
cost of production was not present among the workers. 

And this might have been expected. The spectacular events, for 
example, the trust movement and the passing of the frontier, which 
marked the coming in of our current stage of industrialism sank into 
the minds of the workers as a warning that the day of automatic 
and easy rise to responsible positions had really passed. There came 
to them a realization of what the forces of the Industrial Revolution 
had, unguided, wrought. And they were not minded to acquiesce, 
for belief in a beneficent "natural order" of things had yielded, thanks 
to the influence of Darwin, to an evolutionary philosophy which 
demanded improvement and it yielded the more readily because many 
happenings had, as we have seen, engendered distrust, suspicion, and 
fear. In default of intelligent action by either management or society, 
the workers turned naturally and properly to a device of their own 
with which they had long experimented — the union. That their 
earlier, and indeed their present, demands were formulated in terms 
of the gain spirit which seemed to them the characteristic thing in 
industry, that they sought and still do seek more wages, and more 
and more, deceives no one who watches other than surface indica- 
tions. Wage alone will not bring contentment in such an impersonal 
specialized society as ours. Wage alone cannot bring men to work 
together effectively. It, unaided, will not remove sourness, suspicion, 
and hostility. Powerful as it is, valuable as it is when wisely used, 
it must be linked with forces making for pride of workmanship, 
interest in work, knowledge of worth-whileness to society, security of 
economic and social position, and sense of responsibility, before we 
shall unlock those vast resources of human energy which now lie 
dormant because we have not given thought to the fashioning of 
keys which will free "the will to do." 

Let us not deceive ourselves concerning the significance of this 
"will to do." It involves no mere unthinking performance of "an 
honest day's work," whatever that may mean. It implies the call- 
ing forth of those latent powers which emerge in the joy of doing, 
and doing understandingly — in the joy of intelligent service. The 
magnitude of those latent powers we cannot even guess, though hints 



THE ADMINISTRATION OF PERSONNEL 159 

have been given each of us in our own experiences, and the sense of 
waste is appalling when we reflect that such powers grow by utiliza- 
tion. Perhaps, both inside and outside the factory, we are not now 
realizing on one-quarter of the human resources which would be 
called into being if men worked together understanding^ with a real 
"will to do" — perhaps not one-tenth, perhaps not one- twentieth. 
Who knows ? We merely know that the waste is enormous. 

Let us not deceive ourselves, either, concerning the difficulties 
involved in calling forth this will to do. Generations of sour distrust 
must be lived down and that cannot happen until the sources of dis- 
trust have been removed. Even after the sources of distrust have 
been removed, there must yet come understanding, and this involves 
both knowledge and appreciation of the place of industry and of 
specialists in social progress. Not only are the difficulties great, but 
co-operation in solving them will come grudgingly. The prevailing 
attitude of hard-headed management is doubtful, if not frankly 
antagonistic, toward such an enterprise. The prevailing indifference 
of society at large (witness the lack, in our elementary and secondary- 
school systems, of studies leading to an understanding of our social 
relationships) bodes ill for effective co-operation by society, notwith- 
standing the present hectic interest in "Americanization." The 
prevailing attitude of the worker, one of indifference tempered with 
distrust and hostility, means much cultivation before even seeds can 
be sown. Nevertheless, the game is worth the candle. Even if he 
can make but a few halting steps toward the ultimate goal, the per- 
sonnel manager must keep it before him. Men must be brought to 
work together effectively, and full effectiveness can come only with 
the will to do. Administration of incentives must be in terms of 
that outstanding fact. 

PROBLEMS 

1. "In other words, restricted effort in production arises from fears respect- 
ing the contribution each of the parties makes, or concerning the share 
which each of the parties takes. Both are based in the fear that 
rewards will not be adequate or proportionate to the effort put forth." 
How can these fears be minimized or eliminated ? 

2. "Frequently a greater output is the result of, or involves, changes and 
readjustments which are positively painful and disadvantageous to the 
workman directly concerned." Cite such a case. Is there anything 
the manager can do about it ? Has the worker no redress ? 



160 BUSINESS ADMINISTRATION 

3. The following are listed by one writer as causes of distrust and 
suspicion: 

1. Dissociation of workers from industrial management and respon- 
sibility. 

2. Mutual ignorance of each other's points of view. 

3. The suspicion of profiteering by the management and of unjust 
demands for increased wages on the part of the laborers. 

4. Fear of unemployment and its consequences. 

5. Reluctance of some employers to recognize trade unionism and to 
- organize themselves in federations. 

Suggest concrete ways in which these causes can be eliminated or 
minimized. Are you certain that output would be increased by the 
removal of the fear of unemployment ? 

4. What effect has the transfer of thought, skill, and intelligence from 
the worker to the machine and to management had upon the security 
of the worker's position ? Upon incentive ? 

5. The insecurity of labor has been ascribed to one or more of the follow- 
ing: (a) the machine system; (b) production on a large scale; (c) pecu- 
niary competition; (d) the sensitiveness of modern industry; (e) the 
scheme of prices; (J) the rhythm of the business cycle; (g) the rapid 
development of technique; Qi) dependence upon distant and future 
markets; (i) specialization; (J) weaker position in the bargaining 
relation. Are these points well taken? What bearing do they have 
on incentive ? 

6. "It will be observed that the elimination of fear has been at the root 
of all regulation Industry has thus far undergone." Consider the 
governmental regulations you know of and cite the fears each was 
designed to remove. 

7. Some people think one of the great difficulties in connection with labor 
problems is that the incentives which labor had in former days have 
been taken away by the consequences of the Industrial Revolution. 
Make out a list of the incentives labor had in the days of medieval 
industry in England. What ones of these have been taken away by 
the Industrial Revolution ? Have any new incentives sprung up to 
take the place of the old ones ? Is the wage the only incentivt today ? 

8. Gilbreth outlines his treatment of incentives as follows: 



Direct 

f Reward I £ r ° m0ti0n 
Pay 

f Negative 
Punishment s t» •;• 

Positive 



. Indirect 



Explain and illustrate. 



THE ADMINISTRATION OF PERSONNEL 161 

9. "But it is not unlikely that we shall find, upon candid examination 
that even under self-direction there is still much machine work which 
offers no outlet for creative energy." What can be done about this work ? 

10. The modern great automatic factory has probably more chances for 
interesting work for more people than ever did the medieval and 
romantic small shop." Do you think so? If so, can these chances 
be utilized ? 

11. "Yet it would be foolish to suggest any one panacea for uninteresting 
work. How to make work interesting is just as much a field of experi- 
ment and investigation as how to invent a machine or lay out a plant. 
And business men, engineers and educators can be just as ingenious 
and successful doing it." Have any plans been worked out? If so 
what are some of them ? 

12. "As a rule, men habitually use only a small part of the powers which 
they actually possess and which they might use under appropriate con- 
ditions." What are appropriate conditions? Can they be created in 
the modern factory ? If so, how ? If not, why not ? 

13. "In fact the current industrial unrest is due in great part to the enor- 
mous accumulation of suppression which the instincts of workers have 
undergone in the grim effort to get a living." Discuss. 

14. "In remuneration of employees, no hard and fast rules of universal 
application exist and moreover a system that would produce excellent 
results under one man might prove wholly unsuccessful under another." 
Could several systems of payment be used in one shop ? 

15. In what cases is day work desirable? In what cases piecework? 

16. "The contract system exists where foremen in charge of work are 
given a certain price for the work to be done. They hire and direct the 
men, usually paying them on a day basis." What are the advantages ? 
The disadvantages ? 

17. How can the day wage be administered so as to promote efficiency? 

18. "As the influences of aggregation and specialization began to make 
themselves felt and as personal relations vanished, the day-work 
method became less and less applicable." Explain. 

19. What are the advantages of the ordinary piece-rate system to employer 
and worker? Its disadvantages? How do you account for the fact 
that piece-rate wages have nearly always been attended by rate-cutting ? 

20. "After all, one argument in favor of the piece rate is decisive. When 
pay is so much per piece it is a matter of indifference to the manager 
how long the laborer takes to finish the piece. Supervision may thus be 
largely dispensed with and of course this means a saving." Is this 
true? 

2i. "Task setting furnishes a good example of the interdependence of busi- 
ness problems. The task for an individual workman cannot wisely be 



162 BUSINESS ADMINISTRATION 

set until routing, scheduling, and standardization, etc., has occurred." 
Explain. Can you put content into the "etc."? What is meant by 
task setting ? 

22. "The Taylor plan establishes by study a standard time. The worker 
gets a high piece rate when the standard is attained and a low piece 
rate when it is not attained." What is presupposed in the Taylor 
plan ? What are its advantages ? Its disadvantages ? 

23. "Henry R. Towne adopted this scheme. He found out average labor 
cost per unit in the best year before introducing his scheme. If now a 
saving occurs in this cost the saving is distributed at the end of the 
year or at the end of some considerable time as follows: 50 per cent 
to the firm, 10 per cent to foremen, 40 per cent to gang bosses and 
workmen on the basis of the annual wages." What are the advan- 
tages ? The disadvantages ? 

24. "Under the Gantt plan the worker receives only a day rate in case he 
does not accomplish the task set. The task is set on the basis of a 
scientific investigation. If the worker accomplishes the task he gets 
his day rate plus a bonus in the form of an extra time allowance, usually 
from 25 to 50 per cent of the time allowed for the task." What are 
its advantages ? Its disadvantages ? 

25. "Like the Halsey and Gantt systems, Emerson assures the workman 
his day wage. Like Taylor and Gantt he sets a standard performance 
based on careful study. For the attainment of the standard a large 
bonus is offered as in the Gantt method, but smaller bonuses may be 
earned before reaching this standard. In the practical operation of 
the method by Mr. Emerson the bonus is calculated monthly and not 
for individual jobs." What are the advantages of the Emerson plan ? 
The disadvantages ? 

26. "Rewards under scientific management are (a) positive, (b) predeter- 
mined, (c) personal, (d) fixed, (e) assured, (/) prompt." What is the 
significance of each statement ? 

27. "The accurate measurement of effort does not in itself either raise or 
depress wages." Is this equivalent to saying that it has no bearing 
on wage determination ? 

28. "Some of the wage systems are merely modes of payment. Others 
are philosophies of management." Explain. 

29. A manager started a new department. He could not fix wages at the 
market rate of that vicinity for there was none. He began by setting 
the wage in accord with the neighborhood cost of living and the standard 
of the men he would take on for the new work. What would you 
have done ? 

30. "I have solved the labor problem so far as my own factory is con- 
cerned. I pay my men a rate of wages somewhat higher thari they 
can get elsewhere. For them I have provided recreation facilities, 



THE ADMINISTRATION OF PERSONNEL 163 

sanitary conditions of employment, etc. Every employer will solve 
the labor problem if he does as I have done." If all employers should 
follow this employer's example, would the problem be solved ? 

31. Why do unions attempt to establish the principle of uniformity with 
respect to wage rates, hours of work, and conditions of employment 
generally in a trade ? 

32. "A wage system that will stimulate output is desirable in that it reduces 
unit labor costs. However, a wage system that will stimulate output 
is desirable even though it does not materially reduce the unit labor 
cost." Explain. 

33. "There may be cases where it is wise policy to stimulate production 
by an increase of wages more than proportionate to the increase in 
output." What cases ? 

34. If the worker produces three times more output under scientific 
management than he does under the traditional plan, why does he not 
get three times as much wages ? 

35. Can an individual firm safely enter into an iron-clad agreement with its 
men never to cut a piece rate ? Can it safely refrain from such an agree- 
ment? 

36. "A thoroughly effective method of remuneration includes both prin- 
ciples, (1) the differential incentive, which acts on the individual as 
such; and (2) profit-sharing, which acts on him in his collective capacity, 
as a member of a body bound together by common interests and work- 
ing for a common end." Is this the solution? Is it always possible? 

37. As a stimulus to production, under what circumstances would profit- 
sharing be of most value ? Of least value ? 

38. "On the side of the employees we find several reasons, the most com- 
pelling of which is the unalterable hostility of the trade unions to any 
form of profit sharing or labor co-partnership." Do you see any good 
reason for this hostility ? Are not these plans of benefit to labor ? 

39. What are the prerequisites to the successful operation of a policy of 
promotion in accordance with merit ? 

40. Define "voice in management." 

41- Suppose that you should become convinced that, everything considered 
and in the long run, it would be profitable financially and worth while 
socially for labor to "be taken into partnership" with capital in a 
spirit of "industrial democracy." (a) What do these terms mean to 
you? (b) How could such a thing be wise financially? (c) What 
obstacles are in the way of its attainment ? 

42. "The inequity of labor exercising an important voice in the direction of 
industry (to which, of course, it is entitled) without at the same time 
accepting responsibilities for the service rendered by industry to society 
is obvious. Here as elsewhere the rule must apply that power and 
responsibility should be co-ordinate." How can he be made to assume 
responsibility ? 



164 BUSINESS ADMINISTRATION 

43. "The shop committee has been installed and may be installed by 
employers as a mere subterfuge, designed to ward off a real shop 
organization by controlling the election of its committees, by mixing 
unorganized with organized workers, by preventing the employment of 
trade unionists." Is this possible? What do you think of such a policy? 

44. "The blighting character of industry is due to its motivation, which is 
wealth exploitation and not wealth creation." Do you agree? What 
can we do about it ? 

45. It is fairly easy to see why and how the employer is interested in 
increased incentive. Is the worker interested ? Is society ? 

46. "The workman needs to know more about the actual problems of 
management. He needs to know something about overhead, about 
marketing difficulties, about the dependence of production and pro- 
duction conditions upon marketing, and the dependence of marketing 
upon economical production, about the numberless hazards and chances 
of loss which his employer must face. He needs, in short, more of the 
manager's point of view." Can the manager give him this point of 
view ? If so, how ? If not, how can the worker get it ? 

11. THE FEARS OF LABOR AND OF CAPITAL 1 

In the processes of Industry, the unwillingness of individual 
parties to put forth their utmost effort may arise from defects of 
character, inadequacy of training, or lack of opportunity. Where 
opportunity, training, and capacity are present, failure to realize 
the best in effort arises mostly from the fear that one or other of 
the parties will put forth a less than proportionate share of effort, 
or claim a more than proportionate share of reward. 

The fears which circumscribe the freedom of effort of Capital, 
Management, and the Community are by no means so real or con- 
siderable as those which surround Labor. They differ, also, in that 
they represent consequences much less serious to human life. Espe- 
cially is this true of fears concerning employment. Under conditions 
in Industry which make the several parts of industrial processes 
dependent on many others, and which demand intense specialization 
of effort, it is impossible to exaggerate the imminence of fear in the 
lives of workers wholly dependent upon continuous employment for 
the immediate necessaries of life. 

Capital can wait for its reward. Capital, moreover, is free to 
move about. If not required in a particular locality or business, it 
readily finds investment in some other place or enterprise. Labor 

1 Adapted by permission from W. L. M. King, Industry and Humanity, 
pp. 234-43. (Houghton Mifflin Company, 1918.) 



THE ADMINISTRATION OF PERSONNEL 165 

is not so mobile. It is confined in a thousand and one ways. It is 
necessarily largely restricted to occupations to which it has been 
trained. It is more or less rooted to localities which speak of home 
and its associations. It is largely ignorant of the world without. 
Capital is a citizen of the world, with no definite occupation or home. 
It suffers little from fears of isolated position, substitution, dismissal, 
arbitrary and unjust treatment. Such risks as it runs are very 
largely its own. How vastly different is life to its possessor under 
such circumstances! 

It is the fear of unemployment which lies at the root of most of 
the minor fears which Labor entertains. The fear of unemployment 
is in reality the fear on the part of Labor that capital will not be 
provided to carry on industry continuously, and under conditions 
which will afford adequate remuneration to effort. It is an out- 
growth of the fallacy that quantity of work is necessarily limited. 
This fear gives rise to the fear that the introduction of new machinery, 
or the increased use of machinery already installed, will displace 
labor; the fear that speeding-up processes will diminish work; the 
fear that female, child, unskilled, or imported labor will be substi- 
tuted for skilled; the fear that men of one trade will encroach upon 
the work for which men of other trades have been specially trained; 
the fear that the number of apprentices will be so increased as to 
lessen the requirement for skilled hands; and the fear that long hours 
and continuous overtime will exhaust employment. 

Allied to the fear of unemployment is a class of fears which, as 
seen, have a special bearing on industrial peace: the fear of discharge 
and of unfair treatment through the utter helplessness of the isolated 
workman in relation to the capitalist employer, and, still more, in 
relation to a powerful corporation; the fear of lockouts or arbitrary 
exactions, and the many fears incident to tyrannical and capricious 
behavior on the part of those in authority, and especially of subor- 
dinate officials toward workers under their direction. This fear 
extends to the power of wealth to defeat the ends of justice, by cor- 
rupting officials and influencing or controlling the judiciary and 
legislatures, and to the influence also of a class interest and sentiment 
on the part of the monied classes as distinguished from the working 
classes. With it are allied the many fears which have a special 
bearing on health in Industry: fears, for example, of physical injury 
and ill-health, and of inadequacy of compensation or redress when 
injury is done. 



/ 



166 BUSINESS ADMINISTRATION 

Arising from the worker's sense of utter helplessness is also the 
fear, apart from combination, of the absence of any voice in deter- 
mining the contract on which services are given, and the fear, in 
consequence, of unfair terms in bargaining and in determining the 
rate of remuneration, the hours of labor, and working conditions. 
This extends to the fear of reductions in standards already gained; 
the fear of individual or general reductions in wages, of increase in 
hours, of change in customary practices; the fear of resistance on 
the part of employers to combination; and the fear of methods 
intended to destroy or weaken organization. Whatever begets fear 
of opposition to organization helps to intensify other fears. 

Beset by fears at once so numerous and constant, it must be 
apparent that Labor is in no way capable of putting forth effort to 
the utmost of its capacity. Where the mind is in a state of unrest, 
the arm is divested of some of its power, and the hand of some of its 
skill. Time which otherwise might be freely employed in furthering 
production, with benefit in opportunity and reward to all the parties 
to Industry, is consumed in effecting organization against ills that 
are feared, or in agitation concerning their existence. 

Whilst less serious in their immediate personal consequences than 
the fears which Labor endures at the instance of Capital, the fears 
which Capital experiences at the instance of Labor are by no means 
inconsiderable or unreal. What these fears are is well known; they 
have received heightened emphasis under the stress of war. The 
source of all is the fear that Labor will not be provided in quantity 
and quality sufficient to carry on Industry continuously, and under 
conditions which will afford adequate remuneration to investment. 
Foremost is the fear of strikes, and their consequences. If Labor 
refuses to work, Capital and Management likewise become idle, 
unless transferred to other industries. Transfer, however, is not 
always possible. Capital invested in Industry is partly "fixed" in 
plant and equipment; and markets, as well as Labor, have to be 
found for the output of new enterprises. Management, too, becomes 
identified with particular classes of business, and new openings are 
not always at hand. 

The fear of strikes would be minimized were actual or threatened 
resort to strikes postponed until other available means of securing 
redress were exhausted. Unfortunately, strikes are sometimes 
brought on where no grievances whatever exist. The cause of the 



THE ADMINISTRATION OF PERSONNEL 167 

so-called "sympathetic strike" may lie wholly beyond the control 
of the trade or industry affected. Because of uncertainty on so 
many grounds, the possibility of strikes has become an ever-present 
fear. 

Allied to the fear of strikes is the fear of labor combination, and 
its attempts to control the labor market, and to restrict output. 
This fear has greatly increased with the augmentation of Labor's 
power consequent upon extensive organization and the growth of 
class consciousness. The obnoxious restrictions are all in the nature 
of limitations upon the freedom of initiative and power of direction, 
usually of the employer, but sometimes also of the workman. Briefly 
classified, restrictions of the kind include such practices as hampering 
the installation of the best machinery, or the speed at which it is 
worked; preventing the introduction of new processes; limiting the 
freedom to engage, or to promote, or to put at any kind of work, any 
workman, irrespective of training, age, or sex. Among such restric- 
tions are also to be included the limitation in numbers of apprentices; 
the insistence on trade unionism and employment of union labor to 
the exclusion of any other; the demarcation of employment; the 
requirement of a minimum wage; the objection to systems of 
remuneration by piece work or bonus systems; and restrictions in 
hours of work, and the prohibition of overtime. 

Analogous to the class of fears begotten of labor control and 
restricted output, are the fears that "discipline," as it is termed, will 
be interfered with; that employers will not be free to dispense with 
the services of undesirable, incompetent, or unnecessary workmen 
without risking a cessation of work; and that disputes cannot be 
adjusted except in accordance with methods prescribed by organiza- 
tions to which workmen belong. 

The fear that Labor can be secured, so to speak, only on its own 
terms, which may involve exorbitant demands as respects hours, 
wages, and working conditions, is supplemented by the fear that even 
where a contract is entered into, with precise stipulations, its pro- 
visions may not be lived up to. There is the fear also that one 
concession may be used to force another, and that arbitrary exactions 
of many kinds may be attempted. 

Finally, there is the class of fears associated with extreme 
measures, with revolutionary movements, and with violence, as, for 
example, the boycott, sabotage, revolutionary socialism, revolutionary 
syndicalism, the I.W.W.'s, and all forms of anarchy. 



168 BUSINESS ADMINISTRATION 

12. THE GULF BETWEEN LABOR AND CAPITAL 1 

It is frequently stated that the necessity for establishing industrial 
relations today is the growth of the factory system wherein all per- 
sonal contact is lost between owner or manager and the worker. 
While this is true, it does not sum up the entire loss. In the system 
of absentee directorate there are other evils as well, and these taken 
together have set up situations where there have been clashes over 
the rights, needs, and aspirations of those who belong to the class of 
employers and those who form the great group of employees. These 
losses in fitness for control may be stated in this wise: 

a) The loss of personal contact and relationship that formerly 
existed between the master and his skilled workmen and apprentices. 

b) The loss due to the lack of personal knowledge of the work 
being done on the part of present-day directors and managers. 

c) The loss due to the lack of personal knowledge of the tools and 
equipment used in production of the part of present-day managers. 

d) The loss of the direct oversight of saving and conserving 
materials and human effort on the part of present-day managers. 

e) The withdrawal from productive work of the families of the 
directors and managers. 

/) The loss of equality of living conditions between the families 
of the directors and managers and the workers. 

The effect of these losses in creating a situation where there may 
be a clash of interests, and failure on each side to understand and 
appreciate the other, is brought home when we contrast the human 
relationships in the days of craftsmanship with those of the factory 
system. 

See also p. 543. Some Consequences of Technological Industry. 



13. THE INSTINCTS AND MOTIVATION 2 

The importance to me of the description of the innate tendencies 
or instincts to be here given lies in their relation to my main explana- 
tion of economic behavior, which is: 

1. That these instinct tendencies are persistent, are far less 
warped or modified by the environment than we believe; that they 

1 Taken by permission from L. P. Alford, "Status of Industrial Relations," 
American Society of Mechanical Engineers, No. 1693 (1919) pp. 166-67. 

2 Adapted by permission from C. H. Parker, "Motives in Economic Life," 
American Economic Review, VIII (1918), 212-31. 



THE ADMINISTRATION OF PERSONNEL 169 

function quite as they have for a hundred thousand years; that they, 
as motives in their various normal or perverted habit form, can at 
times dominate singly the entire behavior and act as if they were a 
clear character dominant. 

2. That if the environment through any of the conventional 
instruments of repression — such as extreme religious orthodoxy, 
economic inferiority, imprisonment — or physical disfigurement — such 
as short stature or a crippled body — repress the full psychological 
expression in the field of the instinct tendencies, then a psychic 
revolt, a slipping into abnormal mental functioning, takes place, 
with the usual result that society accuses this revolutionist of being 
either wilfully inefficient, alcoholic, a syndicalist, supersensitive, an 
agnostic, or insane. 

The following catalogue of instincts includes those motives to 
conduct which, under observation, are found to be unlearned, are 
universal in the species, and which must be used to explain the 
innumerable similarities in behavior, detached in space and time 
from each other. [Only the catalogue has been retained. The 
original has much excellent explanatory material.] 

1 . Instinct of gregariousness. 

2. Instinct of parental bent: motherly behavior: kindliness. 

3. Instinct of curiosity: manipulation: workmanship, 

4. Instinct of acquisition: collecting: ownership. 

5. Instinct of fear and flight. 

6. Instinct of mental activity: thought. 

7. The housing or settling instinct. 

8. Instinct of migration: homing. 

9. Instinct of hunting. 

10. Instinct of anger: pugnacity. 

11. Instinct of revolt at confinement: at being limited in liberty of 
action and choice. 

12. Instinct of revulsion. 

13. Instinct of leadership and mastery. 

14. Instinct of subordination: submission. 

15. Instinct of display: vanity: ostentation. 

16. Instinct of sex. 

The instincts and their emotions, coupled with the obedient 
body, lay down in scientific and exact description the motives which 
must and will determine human conduct. If a physical environment 
sets itself against the expression of these instinct motives, the human 



l?o BUSINESS ADMINISTRATION 

organism is fully and efficiently prepared for a tenacious and destruc- 
tive revolt against this environment; and if the antagonism persists, 
the organism is ready to destroy itself and disappear as a species if 
it fails of a psychical mutation which would make the perverted 
order endurable. 

Even if the labor-class children evade those repressive deport- 
ment traditions that characterize the life of the middle-class young, 
at a later date in the life of these working-class members certain 
powerful forces in their environment, though they work on the less 
susceptible and less plastic natures of mature individuals, produce 
obsessions and thwartings which function at times, exclusively 
almost, in determining the behavior of great classes of the industrial 
population. The powerful forces of the working-class environment 
which thwart and balk instinct expression are suggested in the phrases 
"monotonous work," "dirty work," "simplified work," "mechanical 
work," the "servile place of labor," "insecure tenure of the job," 
"hire and fire," "winter unemployment," "the ever-found union of 
the poor district with the crime district," and the "restricted district 
of prostitution," the "open shop," the "labor turnover," "poverty," 
the "bread lines," the "scrap heap," "destitution." If we postulate 
some sixteen instinct unit characters which are present under the 
laborer's blouse and insistently demand the same gratification that 
is, with painful care, planned for the college student, in just what 
kind of perverted compensations must a laborer indulge to make 
endurable his existence? A western hobo tries in a more or less 
frenzied way to compensate for a general all-embracing thwarting of 
his nature by a wonderful concentration of sublimation activities on 
the wander instinct. The monotony, indignity, dirt, and sexual 
apologies of, for instance, the unskilled worker's life bring their 
definite fixations, their definite irrational, inferiority obsessions. 

The balked laborer here follows one of the two described lines of 
conduct: (i) he either weakens, becomes inefficient, drifts away, 
loses interest in the quality of his work, drinks, deserts his family; 
or (2) he indulges in a true type inferiority compensation, and in 
order to dignify himself, to eliminate for himself his inferiority in 
his own eyes, he strikes or brings on a strike; he commits violence, 
or he stays on the job and injures machinery, or mutilates the 
materials. He is fit food for dynamite conspiracies. He is ready to 
make sabotage a part of his regular habit scheme. His condition is 
one of mental stress and unfocused psychic unrest, and could in all 



THE ADMINISTRATION OF PERSONNEL 171 

accuracy be called a definite industrial psychosis. He is neither 
willful nor responsible; he is suffering from a stereotyped mental 
disease. 

14. THE RELEASE OF HUMAN ENERGY 1 

A large fund of human energy is usually latent, a fact shown 
when people engage in sports. Even the lazy youth, so called, will 
surprise his elders by the head of steam developed when a fishing 
trip is under consideration; and if spading for angleworms could be 
appropriated for purposes of tilling the garden, a family supply of 
vegetables would be a universal luxury. The tale is told of a design- 
ing person who suggested to a group of boys that a ditch was on 
fire and that the stones in a nearby pile were buckets of water. The 
boys put out the "fire," incidentally moving the stone heap, with 
great enjoyment and actual refreshment. In the world at large here 
and there are individuals who work in the spirit of play; they do 
much with far less fatigue than was experienced by the negro who sat 
on the plow handles " hurrying up sundown." But in a multitude 
of situations today the spirit of joyful accomplishment is absent. 
Freight cars are slammed together — they belong to "the company." 
The plumber is deliberate. Workmen loiter and the comings and 
goings of the boss are noted with an interest which does not appear 
in putting in window casings. The ticket agent who "damns" the 
railroad upon opening his envelope, containing in fact a slight advance 
in wages, reveals a state of mind. The spiritless and sodden tread 
of millions headed for factories cannot but be impressive. Enthusiasm 
is guarded against by system, lest the employee produce more than 
the rules of his fellows allow; and this is not to criticize a method of 
warfare, for warfare it is. How many are joyful over the day's 
work? How often is the clock not stared out of countenance? 
What of the inner strain and depression of employees in factories 
when they "look upon their employer as an aristocrat, their foreman 
as a slave driver, their machine as a treadmill, and the world at large 
as against them," and when "their faces are frozen in a perpetual 
grouch?" 

The forced production represented by slave-labor and the diffi- 
culty of getting people to work with spirit suggest that there has 
been historically and is today an almost complete neglect of the 

1 Adapted by permission from A. D. Weeks, "The Mind of the Citizen," in 
American Journal of Sociology, XXI (1916), 642-48. 



172 BUSINESS ADMINISTRATION 

organization of industry with reference to natural incentives. People 
cannot be kept from working, provided employment corresponds to 
nervous organization. Need there be so complete a divorce between 
spontaneity, preference, and play, and the job? Must work be 
drudgery ? Cannot the distinction between work and play be greatly 
lessened if not abolished? Nothing is more unsuited to human 
nature than the steady grind imposed by the division of labor and 
the factory system, which tend to make man a machine. Especially 
odious is the antithesis of routine and initiative and of physical and 
mental activities represented by the workroom and the office; one 
performs, the other manages; one is hands, the other head. In split- 
ting up work we split up people. One has to be trimmed down to 
fit into a niche. 

It might seem difficult to introduce into a system of production 
a distinct recognition of the individual tendencies related to travel, 
experimentation, curiosity, sociability, sympathy, hunting, leader- 
ship, and the like, but only by more fully conforming to natural 
interests may the time-honored curse of drudging labor be trans- 
formed into joyful effort. 

There should be proper and sufficient motivation in industry. 
To work because one fears to lose a position is a low condition, and 
the dread of the displeasure of the boss reduces one to the status of 
dumb driven cattle. Even to spend a lifetime in labor for the sake 
of anticipating funeral expenses does not strike one as adequate 
motivation. There must be sizable returns or explicit approval; 
there must be the feeling that one is getting somewhere, that he is 
getting something out of his work for himself, and that every stroke 
tells for an objective point. To exhort one to love his work when 
he gets nothing out of it is unseemly. Our systemless compensation 
leaves the great bulk of population without effective incentive. 

It is a question of much importance whether real pleasure is 
taken in work. The actual mental attitudes prevailing among people 
working for wages and salaries are, if among the more elusive, yet 
among the most important conditions of society. If there is chronic 
discord between the man and his job, something is fundamentally 
wrong. Even in cases where irritation does not take the shape of 
open complaint, a seated sense of injustice deeply influences happi- 
ness on earth. Young men set out in high hopes, to become soured 
and careless upon being inoculated with the suspicion that a square 
deal in the economic system is out of the question. They see great 



THE ADMINISTRATION OF PERSONNEL 173 

rewards going to questionable beneficiaries; they see the industrious 
exploited; they come to fear that everything worth going after has 
been gobbled up by the representatives of privilege and corporate 
influence. They ask if it is worth while to try to get ahead; they 
believe the cards are stacked against them. The rewards which society 
should place before the individual should in one respect be like the 
penalties for crime — they should be certain. 

The loosened moral fiber of great numbers, the flabby attack on 
difficulties, the disposition to go with the current, and the apparent 
passing away of a certain Spartan quality of perseverance are asso- 
ciated with a growing skepticism in regard to certainty of reward. 



See also p. 663. Antagonism of Specialists Increases Risk. 



15. WAGE INCENTIVE: FORMS OF PAYMENT 1 

Broadly speaking, there are two possible bases of payment 
within the wage-system — payment for time worked and payment for 
output. There are indeed all kinds of modifications and minglings 
of these two principles; but they are none the less fundamentally 
distinct. A worker may be paid in strict accordance with the time 
spent on the employer's work at so much per hour, per day, per 
week, per month, or per year; or he or she may be paid in accordance 
with the work done at so much per piece, or per unit of effort. Again, 
the method of payment may be either individual or collective: the 
employer may deal separately with, and pay wages by time or output 
to, every worker individually, or a lump sum may be paid over to a 
single worker on behalf of a group, or to the group itself. 

These two systems are, I have said, in principle distinct, however 
they may mingle in practice. But, to a very great extent, they 
do possess a common basis. A time-work system is never wholly 
without relation to output; for the employer inevitably expects a 
certain amount of work from the worker whom - he employs, and if 
this amount is not forthcoming, he finds his remedy in discharging 
the worker. Payment by output, again, is never wholly without 
relation to a time standard; for piece-prices are invariably deter- 
mined to a great extent by the income which constitutes the normal 
standard of life for the workmen concerned. 

1 Adapted by permission from G. D. H. Cole, The Payment of Wages, pp. 1-19. 
(Labour Publishing Company, 1918.) 



174 BUSINESS ADMINISTRATION 

This common basis of time payment and payment by output, 
however, does not remove their essential difference. Under a pure 
time-work system the employer no doubt expects and exacts a mini- 
mum standard of output; but the worker who produces less than 
this, as long as he continues to be employed, and the worker who 
produces more, both receive the same remuneration as the worker 
who produces exactly the minimum demanded. On a system of 
payment by output, on the other hand, the reference to a standard 
weekly wage may determine the general level of remuneration (e.g., 
the piece-work prices, bonuses, etc.); but the actual remuneration 
of the individual worker will vary with his or her output from day 
to day, or from week to week. Payment by time means equal pay- 
ment to all workers who are classified together by the employer or 
by trade union regulation; payment by output means unequal 
remuneration for members of the same grade. 

We have seen that time-work has, in practically all cases, some 
reference to output, in that the employer can and does dismiss a 
man who is not doing what he regards as a fair, or an average, day's 
work. This principle, however, is very elastically applied, and under 
an ordinary time-work system it is seldom possible to say exactly 
what is the minimum amount of work required by the employer. 
Where the minimum becomes fixed, time-work passes over into task- 
work. The task- work system, in its complete form, is a system under 
which the worker is set a definite output which must be attained per 
day, or per week, or per month. If the fixed output is not attained, 
a proportionate deduction is made from the wages paid to the worker; 
if it is exceeded, nothing extra is paid, Needless to say, this system 
is strenuously opposed by the workers, nor does it exist in any organ- 
ised trade; but many of the features of the task- work system exist 
in those cases in which a certain output is rigidly exacted, and the 
worker who fails to reach that output is at once dismissed. 

Not a few of the "efficiency" systems which are connected with 
the name of "Scientific Management" reproduce some of the con- 
ditions of task-work in that they penalise by a specially low rate of 
payment the worker who fails to reach a certain standard of output, 
and reward the worker who reaches or exceeds this output. 

Systems of payment by output are far more various and com- 
plicated than time-work systems. In some cases payment by output 
is the natural and almost inevitable remuneration for certain kinds 
of service which cannot easily be paid by time: in others it is a con- 



THE ADMINISTRATION OF PERSONNEL 175 

scious device for the acceleration of production. In the first case the 
system tends to be simple; in the second the employer, in a continual 
search for new stimuli, tends to adopt more and more complicated 
devices, and very often a job passes through successive stages of time- 
payment, piece-payment, and bonus or "reward" payment. The 
principle of ordinary piece-work is essentially simple. Instead of 
receiving so much per hour, the worker receives so much for every 
operation, or group of operations, performed, at a flat rate per opera- 
tion, the wages received being strictly proportionate to output. 
There are, however, many modifications of this system in practice. 
Where trade unions are strong, they generally attempt to secure a 
guarantee that the earnings of the piece-worker will not fall below 
the hourly rate of wages. Not only do the unions seek to establish 
piece-prices on such a basis that actual earnings under piece-work 
conditions shall be above the standard time-rate; they also demand 
an absolute guarantee that every worker shall receive at least the 
standard time-rate, without reference to output. In some few cases 
they have gone further, and have provided that, since piece-work is 
openly advocated on the ground that it secures greater output and 
therefore greater effort from the worker, more than the standard 
time-rate (e.g., time and a quarter) shall be guaranteed to every 
individual who is working on piece-work. 

Naturally, piece-work is most easily adaptable to those occupa- 
tions in which the work done is "repetition" work, i.e., in which an 
identical job is repeated an indefinite number of times. This is 
the position in all manufacturing industries which are highly stand- 
ardised, and especially in the textile industries. It does not matter 
in such cases whether the number of distinct jobs is large or small; 
for provided that they are repetitive in character, a standard price 
can be fixed for each job. Where the number of jobs is small and 
their nature simple, piece-work conditions are easily adjusted: when 
jobs are numerous and complicated, the most elaborate systems are 
sometimes adopted for the fixing and maintenance of piece-work 
prices. 

So far we have been speaking of piece-work as a uniform system 
of payment strictly in proportion to output. It now remains to 
mention some of the variations of this general principle. Cases 
exist, though they are not frequent, in which, under a straight piece- 
work system, the piece-price diminishes as output increases, the 
price per article diminishing after the output has reached a certain 



176 BUSINESS ADMINISTRATION 

point. On the other hand, in some cases the piece-price increases 
with increased output, in order that production may be stimulated 
to the full. This motive, however, more generally expresses itself 
in the granting of a bonus after output has passed a given point. 
Thus, at this stage, the piece-work system develops into the bonus 
system. 

Bonuses, as an incentive to output, take several forms. The 
simplest is that which we have just described, the bonus being merely 
superimposed upon the piece-work system without any essential 
change in the method of remuneration. In other cases a bonus 
of the same type is superimposed upon a time-work system. Only 
in the premium bonus system and in some American " efficiency" 
systems does a really distinct form of payment arise. In the various 
forms of the premium bonus system the basis is no longer a piece- 
price per article, but a standard time allowance in which the job is 
supposed to be done. If time is saved by the worker, that is, if the 
job is done at greater speed and in a time less than the standard 
allowance, payment is made for a portion of the time saved in 
addition to the hours actually worked. 

There is one other method of remuneration which deserves a 
mention side by side with those described above. This is profit- 
sharing in its various forms. We have seen that the employer often 
desires to adopt a system of payment by results as an incentive 
to output. This end he may strive to attain in another way by 
giving his employees an "interest in the business." Instead of 
affording them a chance of earning time and a quarter or even time 
and a half on piece-work or the premium bonus system, he may 
pay them a percentage on wages varying with the profits of the 
concern. This is, of course, quite different in principle, though 
those employers who advocate it have the same end in view — and 
perhaps other ends as well. It is, however, a distinct method of 
payment, and one which has been, and may yet be, advocated as 
an alternative to piece-work or the premium bonus system; and 
the fact that it may be put forward as an alternative entitles it to 
a place in our consideration. 

[The author sums up his discussion of points of view concerning 
forms of payment as follows.] 

We have seen that a system of payment by results is easiest to 
establish and operate where the following conditions are present: 



THE ADMINISTRATION OF PERSONNEL 177 

(1) Where a given amount of effort and skill can be relied upon 

to result in a given product. 

(2) Where the product is easily measurable in simple quantita- 

tive terms (e.g., by the ton). 

(3) Where increased productivity means a considerable saving 

in standing charges, and thereby a reduction in the cost 
of production per unit. 

(4) Where a highly developed system of collective bargaining 

exists, or where such a system can be created. 
We have seen further what are the main inducements for the 
employer to press for payment by results: 

(1) The desire for increased output as a means of reducing the 

cost of production (this is the same as [3] above). 

(2) The feeling that individualist justice will be done if each 

worker is rewarded according to his productive efficiency. 

(3) In some cases, the possibility of ascertaining the amount the 

worker is capable of producing, and then of cutting prices 
to the lowest possible limit. 
Next we saw the worker's reasons for preferring payment by 
results in certain cases: 

(1) The possibility of greater freedom in respect of time-keeping 

and attention to work. 

(2) The chance of higher earnings, and the greater interest given 

to the work by the monetary inducement. 

(3) In some cases, the same individualist feeling as we ascribed 

to the employers. 

We then turned to the arguments on the other side, and first we 
dealt with these from the employer's point of view: 

(1) The possibility of cheapening cost by supervision and drive, 

and of securing piece-work intensity for time-rates of 
wages. 

(2) In some cases, the feeling that it is immoral for the workman 

to earn more than his standard rate. 

(3) In some cases, the desire to preserve a high quality of 

workmanship. 

Lastly, we saw the working-class objections: 

(1) The fear of speeding-up. 

(2) The fear of price-cutting following on speeding-up. 

(3) The desire to preserve a high standard of craftsmanship. 



178 BUSINESS ADMINISTRATION 

(4) The fear of unemployment due to a higher productivity per 

man in an inelastic market. 

(5) The fear that payment by results will break up solidarity by 

setting man against man and breeding mutual jealousy and 
suspicion. 

16. WAGE INCENTIVE: A PHILOSOPHY OF 
MANAGEMENT 1 

[It has been well said that some wage systems are merely modes 
of payment while others are aspects or applications of a philosophy 
of management. 

One illustration, the differential piece rate, must suffice for our 
discussion of this second form of wage system. Frederick W. Taylor, 
looking at the results of the industrial revolution as they were visible 
in the eighties, saw evidences of tremendous waste. Rejecting piece- 
meal solution, he developed a certain system or philosophy of man- 
agement which is now ordinarily called the Taylor System. Briefly 
stated, he stood for the following: 

1. An increased application of science to industry. Through 
time study, mainly, he planned to develop a great "code of natural 
law" which would be binding upon all industry — upon manage- 
ment as truly as upon worker. Preliminary to and concurrent with 
actual time study, of course, was to come a vast deal of standardiza- 
tion, careful planning, and responsible administration. His appli- 
cation of science to industry was not to be confined to the technological 
side of industry. He was as much concerned in getting the "right" 
wage, from the point of view of incentive, as he was in getting correct 
feeds and speeds. 

2. An increased specialization and an increased responsibility 
for management. Management, primarily, was to be responsible for 
developing the great code of natural law and for applying the code 
within the plant. 

3. The restoration of individual responsibility which had been 
too largely lost in a regime of mass production. 

Such a view, incomplete as it is, will explain why Taylor's 
system of wage payment took the form shown in the following reading.] 

1 Adapted by permission from C. B. Going, Principles of Industrial Engineer- 
ing, pp. 133-35. (McGraw-Hill Book Company, Inc. 191 1.) 



THE ADMINISTRATION OF PERSONNEL 179 

More than thirty years ago, at the Bethlehem Steel Works, 
Frederick W. Taylor began a development of the conception that 
labor of all kinds, operations of all kinds, could be scientifically studied 
and analyzed and reduced to elementary processes; that these ele- 
mentary processes could be performed in some one best way, discov- 
erable by an expert investigator; that there was a minimum of time 
in which each could be continuously performed by a good workman; 
that the workman could be taught to do each elementary operation, 
and hence the entire job, in the best way and the minimum time; and 
that the payment of a considerably larger price for work done accord- 
ing to the standard than for work that failed to reach the standard 
would secure the co-operation of the employee and induce him to put 
forth his best effort. 

Taylor begins by an ultimate analysis of the job into its elements. 
Each of these elements is then subjected to thorough expert study- 
to determine the methods and appliances by which a man working 
steadily at a pace he can maintain without injury can reach maximum 
performance and minimum time. The workman is then provided 
with everything necessary to accomplish, in the standard time, the 
results determined by this study, and he is thoroughly instructed in 
every step of the operation by minutely detailed written schedules 
and by expert advisers. 

Finally, he is paid at piece rates which are set at two different 
levels — a low price per piece if the workman fails to do the job in the 
standard time, and a high price per piece if he does it in the standard 
time. This is the so-called differential rate. The successful worker 
is paid not only for the more pieces he turns out, but he is also paid 
more for each piece. The unsuccessful worker not only makes less 
pieces to be paid for, but is paid less for each piece of the smaller 
number he makes. The money gain to the man who attains standard 
performance thus becomes very large. 

For example, suppose a standard performance for a certain repeti- 
tive job is set at ten pieces completed per day. The piece rate may then 
be fixed at 30 cents each if standard time is attained and only 25 cents 
a piece if it is not. The workman who finishes only nine pieces in a 
day receives but 25 cents each, or a total of $2.25. The workman 
who finishes the ten pieces as a standard receives 30 cents each or a 
total of $3. For an increase of only n per cent in production he 
gains an increase of 33 per cent in wages. This large incentive is 
provided to enlist the co-operation of the workman — to make him 



180 BUSINESS ADMINISTRATION 

contribute his part to the effort which was begun by the manage- 
ment in their study of conditions and their provision of the equipment 
and the instruction. 



See also p. 588. Measuring and Communicating Aids: Time 
Study. 
p. 844. The Range of Time and Motion Study. 



17. WAGE INCENTIVE: A WAGE FORMULA 1 

[This is an interesting attempt to fix wage rates in terms of all 
factors bearing upon the economic good of the plant. The particular 
equation shown was one which is regarded as applicable when the 
premium method of payment was used. Do not try to master the 
details; merely notice the range of factors which are taken into 
account and compare such a method with the ordinary time or piece 
rate system.] 

The equation is 

I"/ K[B ( I+i + m +„y)+R] ( I + 2e \ / \ 

r -[[v <i+i.3*-3.«) U+.S5P*)+s)V' +Td (I+ ' S 7 

and for the determination of labor and indirect cost (not including 
materials) is: 

X=[r(i+e)+R]t 

The definitions of terms follow. They are common in both 
equations: 

r = Base hourly rate man is to receive 

K =A constant, when V is 100 per cent, to bring worker under standard 
conditions to standard rate 

B = Fundamental base rate, temporarily that of 1905 

i = Percentage of increase in living since 1905, taken on the 15th of Janu- 
ary, April, July, and October 

m — Percentage allowed for each extra process known or learned 

n = Percentage allowed for years of connected service 

y = Years of such service 

R = Fixed charges rate per hour which man has chance to modify 

e = Percentage of premium earned on time allowance 

V = 100, which is the standard accomplishment per cent 

E = Standard premium task time set 

1 Adapted by permission from G. D. Babcock, "The Taylor System in the 
Franklin Shops," Industrial Management, LII (191 7), 534-54. 



THE ADMINISTRATION OF PERSONNEL 181 

Pa = Percentage of time absent or late 

5* = Value of spoiled work per producing hours worked 

Pt = Percentage of time under task 

Pi = Percentage of time spent on non-task or straight time work 

C = Co-operation and conduct 

X = Labor and fixed charge cost 

/ =Time taken to do work 



18. WAGE INCENTIVE: WHAT ARE FAIR WAGES? 



Nowhere in business is blank stupidity so rigidly standardized as 
in wages. Take some of the controlling dogmas of wage payment : 
"I pay the market rate of wages; what more can I do ?" 

The " market rate" is now only a cant phrase in merchandising. 
There is no market rate in commodities in spite of market quotations. 
You find prices quoted for the staples such as cotton, wheat, and the 
like, but when you go to buy for particular uses you discover that 
by paying more than the quoted rate you will get an especially good 
quality or brand which will save money in the end by being suited 
to your exact needs. The best purchasing agents seldom buy goods 
at the market; they buy that which will give the best service — the 
largest return for the money without regard to the initial outlay. 
Price is neither a purchasing nor a sales argument among long-headed 
business men. 

The whole trend of modern business is away from making a 
product which will merely join the herd of similar products, and is 
toward making something that will stand out — something that will 
be different and better than the others. But wage methods have 
not caught up with merchandising and they will not until the old 
ideas of master and servant are abandoned and business is considered 
as a democratic, mutual enterprise. 

Another current dogma is that any given product can afford to 
have only a certain amount of wage included in its cost and that the 
w r age must always be a fixed percentage of the sales price. Hence, 
if wages go up, so do the sales prices. This dogma is common to 

1 Taken by permission from Have We Reached the Limit of Wages ? A 
pamphlet by W. R. Basset, pp. 3-14 (The Knickerbocker Press, 1919). Later 
appearing in book form under the title When the Workmen Help You Manage. 
(The Century Company.) 



182 BUSINESS ADMINISTRATION 

both employer and employee; it finds expression in many ways. 
It does not take into account the service of a man; it holds that his 
service value is fixed and inviolate and that there is something sacred 
about pre-war or pre-any other period wages and that we should 
revert to them with all speed. 

The first step in any wage consideration and the first step toward 
the new idea in business is to get the real values on wages. We all 
know that cheap labor is not cheap; paid cotton pickers have proven 
cheaper than slaves — although it took a long time so to convince the 
South because they never reckoned the expense of idle slaves. In 
any operation in which the material costs are high as compared with 
the labor costs, the highest possible pay is the cheapest if it results 
in savings of material or in a fine product, or in both. In the grades 
of production where labor is the big factor, high wages are economical 
if the wastes of human power can be cut to a minimum. Wages are 
measured solely in terms of production. It is the part of the employer 
to see that facilities for production are given and then it is his right 
to demand that they be taken advantage of. 

I have taken the employer's usual approach to wages in an effort 
to show that wages are seldom what they seem to be and that it 
takes a very thorough and scientific knowledge of a business before 
one can say that wages are high or low. The fact that they have 
repeatedly been raised does not mean that they are high, nor that 
they have been lowered mean that they are low. They are high if 
they do not return value; they are low, regardless of their total expres- 
sion in dollars, if they do return value. There is no reason in the 
world that a common worker should not make $150 a week — if he 
does that much work. And it is the combined fault of the employer 
and the employee if he does not do that much work. But the fault 
of neither is chronic. If both regard a wage increase as something 
to add cost and not as a step toward cheapening the product, then 
the raise is wrong. Raising human costs to save eventual costs 
sounds paradoxical, but that is the trend of scientific industry and 
marks the passage of the worker from slave to fellow artisan and of 
the owner from blind to enlightened manufacturing. 

It is really almost impossible to survey even the commonest opera- 
tion without discovering that it is not only costing too much but 
that no one is benefiting from the increased cost. The workers are 
not being paid as much as they should earn, the owner is paying too 
much, and the public is being mulcted in the final cost. 



THE ADMINISTRATION OF PERSONNEL 183 

B 

Wage is generally regarded as the main motivating device in 
modern industry, but what do we really know about methods of 
wage payment ? We know that the various methods are worked out 
in terms of a basic rate, but what is the right basic rate — right in 
terms of calling forth the will to do? Is it the current rate in the 
community? Suppose the current rate is not sufficient to shelter, 
clothe, and nourish the worker to the point where he is a good physi- 
cal machine; will it not pay both society and the manager to lift 
that current rate to a physical efficiency basis? And what is a 
physical efficiency basis? When it is attained, may it not pay 
society and the manager to go beyond it if that calls forth the will 
to do ? What is the current rate of wages, anyhow, but a resultant 
of social forces, some of which are woefully inefficient, not to say 
positively harmful? But perhaps the right wage is a function of 
the manager's costs. What does the average manager know about 
his costs and especially about the causes and conditions lying back 
of those costs? Even when he does know, does what he can now 
afford to pay give any conclusive finding with respect to what he 
ought to pay to call forth the will to do ? But perhaps the right wage 
is a function of a good standard of living. At the best, would this 
do more than guide to the right minimum wage ? And what is a good 
standard of living ? Does it mean a good standard for a single worker, 
or for a family of three, or of five, or of fifteen ? And what does "good 
standard" mean anyway? We shall do well to admit that we are 
in the stage of elementary thinking concerning wage payment as a 
constructive force in industry. Neither our economists, nor our 
psychologists, nor our uplifters, nor our hard-headed business men 
have solved the problem. Barely have they stated it. 

19. PROFIT SHARING: ITS FORMS 1 

Broadly speaking, the profit-sharing principle divides itself into 
five major groups: 

1. Profit sharing in the real sense of the word, with these essential 
features: 
a) Amount to be distributed varies with and depends upon the 

net profits of the concern or upon the amount of dividends 

paid the stockholders. 

1 Taken from Bulletin 208, U.S. Bureau of Labor Statistics, and Mallory, 
Mitchell, and Faust, Profit Sharing as an Aid to Contented, Efficient Labor. 



184 BUSINESS ADMINISTRATION 

b) Proportion of profits for distribution is definitely determined 
in advance. 

c) Benefits of plan extended to at least one- third of the total 
employed, and including employees in occupations other than 
executive or clerical. 

d) Method of determining individual shares is known, at least in 
a general way, to the participating employees. 

2. Limited profit sharing, with these essential features: 

a) Same as (a) in profit-sharing plan above. 

b) Same as (b) in profit-sharing plan above. 

c) Benefits of the plan limited to less than one- third of the total 
employed, and excluding employees other than executive or 
clerical. 

3. Bonus plans, under which the divisible fund does not depend upon 
or vary with the net profits of the enterprise, but upon any one 
of the following factors: 

a) Price for which commodity manufactured is disposed of — the 
so-called sliding-scale wage. 

b) Gross receipts or gross profits — a variant of the sliding scale. 

c) Estimated probable profits on business. 

d) Wages or salaries earned and length of service. 

e) Length of service and thrift, as shown by the participant's 
ownership of stock of the employing company or maintenance 
of a savings account. 

/) Savings of the prospective participants as shown by subscrip- 
tion or ownership of a specified amount of stock of the employ- 
ing company, or savings accounts. 

g) Amount of savings collectively effected in production or 
operation. 

4. Benefit associations which are affected by the following factors in 
distributing their funds: 

a) Where the industry concerned contributes materially toward 
the maintenance of such fund. 

b) Where the industry concerned makes a merely nominal contri- 
bution toward this fund. 

c) Necessities in each individual case. 

d) Length of service or period of membership in association. 

5. Pension funds, with these determining factors: 

a) The fund maintained wholly by the company itself. 



THE ADMINISTRATION OF PERSONNEL 185 

b) Contributions or assessments made on the employees by the 
company for aid in maintaining this fund. 

c) Amount allowed each year by the company definitely deter- 
mined upon in advance. 

d) Amount set aside to be a percentage of the annual pay-roll. 

e) Method of arriving at amounts of pensions awarded each 
person is governed by: 

(1) Length of service. 

(2) Wages earned. 

(3) Individual necessity. 

20. THE THREE-POSITION PLAN OF PROMOTION 1 

[Promotion is, of course, one device which is used in developing 
incentive. This reading should be regarded as a sample of promotion 
schemes.] 

We wish to emphasize, then, three points: (1) the necessity of 
attracting desirable applicants; (2) the necessity of holding, fitting, 
and promoting those already employed; (3) the interdependence of 
these two. 

The three-position plan of promotion considers each man as 
occupying three positions in the organization, and considers these 
three positions as constantly changing in an upward spiral, as the 
man is promoted from the lowest position that he occupies and into the 
position next higher than the highest position that he occupies. 
The three positions are as follows : first and lowest, the position that 
the man has last occupied in the organization; second, the position 
that the man is occupying at present in the organization; third, and 
highest, the position that the man will next occupy. In the first 
position the worker occupies the place of the teacher, this position 
being at the same time occupied by two other men, that is, by the 
worker doing the work, who receives little or no instruction in the 
duties of that position except in an emergency, and by the worker 
below who is learning the work. In the second position the worker is 
actually in charge of the work, and is constantly also the teacher of 
the man next below him, who will next occupy the position. He is 
also, in emergencies, a learner of duties from the man above him. 

1 Taken by permission from F. B. Gilbreth and L. M. Gilbreth. Reprinted 
from The Annals of the American Academy of Political and Social Science, LXV 
(1916), 289-96. 



186 BUSINESS ADMINISTRATION 

In the third position the worker occupies the place of learner, and 
is being constantly instructed by the man in the duties of the 
position immediately above. 

Naturally a plan like this demands a close co-ordination of all 
positions. This is provided for through the master, promotion chart. 
This chart is in the hands of the man in charge of promotion. It is 
slightly different for each organization. It consists of a schematic 
arrangement of all positions in the organization, so arranged as to 
provide for lines of most rapid advancement along the various func- 
tions and subfunctions under which the measured functional manage- 
ment by which we operate works. 

The interests of the individual worker and his education as to 
importance of promotion are carried on through the individual 
promotion charts. Upon these the records of each and every member 
of the organization are separately kept. These sheets are often 
called "fortune sheets," and it is this aspect of them that is of peculiar 
interest to the psychologist. When a worker becomes a member of 
the organization, he is called into the department in charge of advance- 
ment or promotion, and given one of these fortune sheets. Upon it 
is shown his present position, and he and the man in charge outline 
together his possible and probable line of advancement. The sheet 
then becomes his fortune map, or fortune schedule. The projected 
line of promotion is outlined in green, and upon it are placed the 
dates at which it is hoped he may reach the various stages of advance- 
ment. At set times the worker and the promotion chief, or one of his 
helpers, meet, and the line of actual progress of advancement of the 
worker is traced upon the map in red, with the dates of achieving 
the various positions. The two then consult as to existing conditions, 
the special reading and studying necessary for fitting for the new 
positions, possible changes or betterments. The direct product of 
this is that the worker understands what he is doing, gets expert 
advice for greater progress, and realizes that there is and must be 
co-operation between him and the promotion department for the 
good of all concerned. 

The by-products are equally, or more, important. One is that 
the worker is glad to impart all information that would be of help 
to the organization as to his history and antecedents, his home and 
other social conditions outside the plant, that help or hinder his 
plans of preparing, ambitions, etc. 



THE ADMINISTRATION OF PERSONNEL 187 

The second by-product of these fortune sheets is directly connected 
with the solution of the problem of getting constantly a group of 
desirable applicants from which to select more wisely. Thus, when 
the worker looks at his fortune sheet and understands the three- 
position plan of employment, he recognizes that he must train some- 
one to take his position before he can hope to be most rapidly 
advanced. Naturally he first looks around in the organization to see 
who is available, for it is always desired that those within the organi- 
zation be advanced first. However, if no such person is available, 
he reviews his entire acquaintance and all possible sources for new 
workers, in order that he may obtain the most desirable person easy 
to train into that position. It is not necessary to dwell long upon 
the advantages of this system. 

2i. EMPLOYEES' REPRESENTATION 

A. DEFINITION 1 

i. The term "employees 7 representation" is being used in this read- 
ing to include an established arrangement whereby the employees of a 
business concern are represented by persons recognized by the manage- 
ment as spokesmen for them in conferences on matters of mutual 
interest. The term " industrial representation" is often used as the 
equivalent of " employees' representation." Neither of these terms 
is to be regarded as synonymous with " industrial democracy," which 
implies a measure of popular control that is not guaranteed in any 
plan of representation we have investigated. 

2. Forms and names assumed. — Employees' representation may 
take the form of "works and shop committees," "joint industrial 
councils," as established in England under the Whitley plan, "shop 
stewards' committees," union "business agents," or some combination 
of these, and under a variety of names. It may exist in non- 
union, "open shop," "preferential shop," or "closed shop" establish- 
ments. The form of organization may embrace simply one concern, 
a chain of plants under common management, a group of works 
under separate managements located in a common district, or a number 
of establishments under separate managements, but representative of 
one or several allied industries. Examples of all of these forms are 
to be found in the United States and in England, some of them having 
been in operation for many years. 

1 Taken by permission from a report of the Independence Bureau. 



188 BUSINESS ADMINISTRATION 

The simplest and perhaps the most characteristic form of em- 
ployees' representation in the United States is the "works committee" 
composed of delegates elected by the workers to represent the various 
departments, groups of related departments, or, in some cases, 
crafts. This body usually meets at stated intervals, weekly or 
monthly, either alone or jointly with an equal, or at least not greater, 
number of persons representing the management, and exercises a 
degree of authority, advisory or final, with reference to complaints 
and suggestions coming from the employees regarding wages, hours, 
working conditions, welfare, and other matters of special interest. 

3. What employees 1 representation provides. — Employees' repre- 
sentation may provide simply an orderly method for the adjustment 
of grievances; it may include machinery for collective bargaining with 
reference to wages, hours, and working conditions; it may be the 
means of eliciting from workers their hearty co-operation and valu- 
able suggestions regarding processes, organization, and policies; or it 
may involve all of these or any combination of them. Its structural 
features may be very simple and the procedure altogether informal, 
or these may be highly elaborate. The power possessed by employees 
through their industrial representation may be that of "public 
opinion" — the authority of the representatives being merely advisory 
to the management — or the management may delegate to the em- 
ployees final authority in regard to certain specified matters. 

B. AN EXTREME CASE 1 

I. In order to safeguard and promote the enduring interests and wel- 
fare of both the employees and the management of the X Manu- 
facturing Company, and to enable that company to play more 
fully and adequately its part as a unit in the economic life of the 
nation, a Conference Committee of twelve shall be constituted, 
whose duty it shall be: 

A. To determine the principles and policies which should govern 
industrial relationships in this plant, and 

B. To set up machinery or processes for carrying these principles 
and policies into effect. 

Six of the members of this Conference Committee shall be selected 
by the employees of the plant from among their number by any 

1 Taken from "A Suggested Plan for a Conference Committee on Industrial 
Relationships" for a certain manufacturing company. 



THE ADMINISTRATION OF PERSONNEL 189 

method which these employees in caucus assembled may deter- 
mine. These six shall designate one of their number as a joint 
chairman. The other six members of the committee shall be 
selected by the management of the plant from among the officials 
or the employees of the company by any method of selection the 
management may determine. These six shall designate one of 
their number as a joint chairman. 

The Conference Committee shall be selected within two weeks 
of the time this plan is received by the parties interested, and 
shall proceed at once to the accomplishment of its task. 
II. The Conference Committee shall approach its task with an 
entirely unrestricted attitude. Solely by way of suggestion and 
not at all as an indication that all the points mentioned below 
shall be considered by the committee, or as an indication that 
the committee's discussion is to be limited to these points, the 
following are mentioned as matters upon which the committee 
may well determine principles and policies to guide industrial 
relationships in the plant and set up machinery for carrying these 
principles and policies into effect. 

A. Matters generally considered to affect primarily the employees, 
but which actually affect employees, management, and com- 
munity alike: 

1. Methods of fixing, paying, and readjusting wages, whether 
day rate, piece rate, or other form of compensation. 

2. Methods of safeguarding and improving working conditions 
by such means as better methods of sanitation, provision 
of safety devices, medical examination and advice, etc. 

3. Methods of increasing the economic security of the work- 
men, such as mutual aid, insurance, savings, investments, 
longer term wage contract, regularization of employment 
and production, etc. 

4. Relationship of employees to outside organizations. 

5. Opportunities for self-expression and initiative on the part 
of the employees, both inside and outside the plant. 

B. Matters generally considered to affect primarily the manage- 
ment, but which actually affect management, employees, and 
community alike. 

1. Employment methods, including classification, advance- 
ment, discharge, discipline, absenteeism, labor turnover, etc. 



190 BUSINESS ADMINISTRATION 

2. Production problems and increase of output, including meth- 
ods of interesting employees in their work, such as the posting, 
or distribution of information concerning the character and 
uses of the product, the various phases of production, the 
achievements of other plants, results of new methods or 
processes, the relationship of shop organization to labor 
efficiency, etc. 

3. Trade conditions, trade competition, and the reduction of 
costs, including methods of eliminating waste of materials, 
better utilization of the practical knowledge and experience 
of the employees, etc. 

4. Relationship of management to outside organizations. 

5. Labor supply and labor administration. 

C. Matters generally considered to affect both the employees and 
the management, but which certainly affect the community 
also, such as: 

1. Machinery for the prevention of differences and the settle- 
ment of such differences as may arise. 

2. Education, adaptation, and training, both in the shop and 
in the schools. 

3. Legislation, both state and national, on matters pertaining 
to the industry. 

4. Lectures, conferences, and research on subjects of general 
interest to the industry, including readjustment of condi- 
tions in industry from war to peace basis. 

5. Utilization of inventions and improvements in machinery 
or methods, securing for each party an equitable share of 
the benefits. 

D. Matters generally considered to affect primarily the com- 
munity, but which also affect both employees and manage- 
ment, such as: 

1. Standards of living and living conditions of the workers, 
including adequate housing, rental charges, economy in 
purchasing, education, recreation, etc. 

2. The relationship of the plant to the social and economic 
life of the community. 

3. The relationship of the industry to the economic and social 
life of the state and the nation. 

4. The contribution of the plant to the problems of industrial 
relationship in the industry as a whole and in the nation at 
large. 



THE ADMINISTRATION OF PERSONNEL 191 

C. ANOTHER CASE 1 

Declaration of principles. — We, the members of the National 
Metal Trades Association, declare the following to be our principles, 
which shall govern us in our relation with our employees: 

Concerning employees. — (1) Since we, as employers, are responsible 
for the work turned out by our workmen, we must have full discretion 
to designate the men we consider competent to perform the work and 
to determine the conditions under which that work shall be prosecuted, 
the question of competency of the men being determined solely by us. 
While disavowing any intention to interfere with the proper functions 
of labor organizations, we will not admit of any interference with the 
management of our business. 

Strikes and lockouts. — (2) This Association disapproves of strikes 
and lockouts in the settlement of industrial disputes. This Associa- 
tion will not countenance a lockout, unless all reasonable means of 
adjustment have failed; neither will the members of this Association 
deal with striking employees as a body. 

Relations of employees. — (3) Every workman who elects to work 
in a shop will be required to work peaceably and harmoniously with 
all his fellow employees, and to work loyally for the interests of his 
employer. 

Apprentices, etc. — (4) The number of apprentices, helpers, and 
handymen to be employed will be determined solely by the employer. 

Methods and wages. — (5) We will not permit employees to place 
any restriction on the management, methods, or production of our 
shops, and will require a fair day's work for a fair day's pay. 

Employees will be paid by the hourly rate, by premium system, 
piece work, or contract, as the employers may elect. 

Freedom of employment. — (6) It is the privilege of the employee 
to leave our employ whenever he sees fit, and it is the privilege of 
the employer to discharge any workman when he sees fit. 

Concerning disagreements. — (7) The above principles being abso- 
lutely essential to the successful conduct of our business, we cannot 
permit the operation of our business thereunder to be interfered with. 
In case of disagreement concerning matters not covered by the fore- 
going declaration and not affecting the economic integrity of the 
industry, we advise our members to meet such of their employees who 
may be affected by such disagreement and endeavor to adjust the 
difficulty on a fair and equitable basis. 

1 Platform of National Metal Trades Association, 1920. 



192 BUSINESS ADMINISTRATION 

(8) In the payment of hourly wages or in the operation of piece 
work, premium plan, or contract system, this Association will not 
countenance any conditions of wages which are not just, or which 
will not allow a workman a fair wage in proportion to his efficiency. 

D. Measuring Aids of Personnel Administration 

Modern management is keen to take advantage of any devices 
which will enable it to see its problems in measurable, objective terms. 
Naturally, such devices are older, better developed, and more widely 
used in other fields of management than they are in personnel adminis- 
tration, for personnel administration is, after all, quite new. So also 
are the social sciences basic to personnel administration new as com- 
pared with the physical sciences used in production. Being new, 
their measuring methods are not well developed. 

Precisely because it is probably the one field in management in 
which "measuring aids" are least adequate, let us see something of 
what the manager has at his disposal in this respect. If "measuring 
aids of management" are found to be already helpful in this new 
field, it will certainly give us increased respect for their helpfulness in 
older and better established functions. 

There are, of course, three matters which need to be measured 
in personnel administration. The job, the worker, and the success 
with which these two are co-ordinated must all be measured. The 
problems below deal with these issues. 

PROBLEMS 

i. What do you think of the argument that "measurement discriminates 
against the weaker brother who should have a right to obtain the same 
pay as the stronger" ? 

2. "A change in attitude toward the medical examination is imminent. 
The medical examination at entrance will gradually assume its real 
function as a means of proper placing. It will result in benefit to 
both employer and applicant. The largely justifiable hostility of labor 
leaders that has accompanied its introduction will tend to disappear." 
Comment on each statement. 

3. Make a list of ways of detecting fatigue. Ways of reducing it. 

•. What information would you look for on a job analysis card if you 
were hiring (1) a crippled soldier? (2) an old man? (3) a woman? (4) a 
boy or girl ? 

5. What is the value of job analysis in transfer or promotion? In case 
of rush in certain departments ? 



THE ADMINISTRATION OF PERSONNEL 193 

6. Would a job analysis be of value in setting wage rates ? Why or why 
not? 

7. Is there one correct kind of job analysis? Might a job analysis for 
hiring purposes be different from that for training purposes? Just 
what is job analysis ? What does it include ? 

8. Can job analysis be advantageously used in fields involving more 
personal elements than does machine work ? 

9. "Making the most of the labor supply at hand by making the labor 
specifications include what the worker need not be, may prove cheaper 
in the long run than the elaborate advertising and scouting schemes 
to which some employers have resorted to secure their employees." 
Show how this could happen. 

10. "In a small organization it is frequently possible for the person in 
charge of employing to know the details of each type of position." 
Would a job analysis be of any value in such a business ? Is it worth 
the cost and effort involved in making it ? 

n. "The employment man soon comes to know the type of man he desires 
for the jobs most frequently in need of filling. For these jobs the 
recorded analysis becomes superfluous. Employment men who have 
made job analyses have told the writer they do not use them as much 
as they had expected." Is this an argument against job analysis ? 

12. Make a list of the ways in which job analysis cards could be used in 
labor administration. 

13. "The fact that the tendency is for factory work to become more and 
more simplified and to be reduced more and more to automatic routine 
by the subdivision of labor and by the development of semi-automatic 
machinery renders psychological tests unimportant because the work 
is made so simple that anyone can do it." Do you agree ? 

14. Quite a vogue is on for use of psychologists as (a) personnel managers, 
(b) advisers to personnel managers. What elements or parts of the 
personnel manager's job require the training of the psychologist ? Do 
these constitute the major part of personnel work? How do you 
account for the way in which the business world has turned to the 
psychologists in this matter ? 

15. "There is every indication that vocational and industrial psychology 
will tend to exterminate the old try-out methods of selecting employees." 
Do you agree? 

16. "The problem of selection can never be entirely solved by even the 
most cleverly devised psychological examination." Why or why not ? 
What will solve the problem ? Do you think it will ever be solved ? 

17. What seem to you to be the matters which can be well handled in 
the vocational guidance of one individual by another ? 

18. Which is more important in employment work, (1) a correct test of 
general mental ability, (2) a correct test of special mental ability ? 



194 BUSINESS ADMINISTRATION 

19. What limitations do you see in the psychological test even when 
applied by experts ? What limitations would be added if employed by 
laymen ? 

20. What are trade tests ? What forms are there ? 

21. As a means of estimating the significance of the rating scale as a meas- 
uring device, rate a group of your teachers as to (a) teaching ability, 
(b) knowledge of subject. Why not rate them without the subdivisions 
mentioned ? 

22. The employment manager of a manufacturer of office furniture and 
filing apparatus has devised a plan whereby employees will be graded 
at the end of the first month and third months and of the first year 
according to dependability, intelligence, industriousness, neatness, 
cheerfulness, and activity. What do you think of such a plan ? 

23. "There are at least four views of a worker's capacity: 

1. What he thinks his capacity is 

2. What his associates think his capacity is 

3. What those above him think his capacity is 

4. What accurate measurement determines his actual capacity to be." 
Could a manager make use of all these ? 

24. Assuming that phrenology were well founded, scientifically speaking, 
what sort of service could it render in the administration of labor? 
What are the scientific objections to phrenology ? 

25. Answer the same question in the case of physiognomy. 

26. As a matter of fact, are we influenced by matters of physiognomy ? If 
so, why ? What difference does this make to you personally ? If you 
become a manager will you be so influenced? Should you be so 
influenced ? 

27. Write out your estimate of the application blank as a measuring device. 

28. "In the prevailing undeveloped state of scientific tests of fitness the 
main reliance of the employment man must be on empirical devices 
for sizing up men. The most important of these and by far the most 
important of all the means of sizing up men is the interview." Do 
you agree ? List other devices used and evaluate them. 

29. "The employment manager should in conversation note whether the 
applicant is mental or manual, directive or dependent, original or 
imitative, social or self -centered, an indoor man or an outdoor man, a 
man of large or small scope, settled or roving in disposition, accurate 
or inaccurate, rapid or slow to co-ordinate facts, dynamic or static." 
Do you think this is a good method ? What advantages or disadvan- 
tages does it possess ? Of what value are the results obtained ? 

30. Two kinds of references are ordinarily required: (a) character refer- 
ences, and (b) references from former employers. Are these of any 
value? If you were hiring a man would you ask for references? 
Why or why not ? How would you use them ? 



THE ADMINISTRATION OF PERSONNEL 195 

31. What is time study? Is it the same thing as motion study? Is time 
study something applicable only to labor? 

32. "The day is coming when the world will demand that the quantity 
of the day's work shall be measured as accurately where one sells 
labor, as when one sells sugar or flour." Do you agree ? 

33. "No measurements, whether they be psychic or physical, are exact 
beyond a certain point." Why then is their value? How can they 
be checked ? 

22. STRENGTH TESTS IN INDUSTRY 1 

[The spring-balance test here described consisted of measuring by 
the balance the resistance the subject offered to pulls applied to cer- 
tain muscle-groups. There are claimed for the test certain diagnostic 
values in such fields as physical classification of workers, criteria of 
fatigue, strain of night work, influence of environment upon strength 
and endurance, etc.] 

Lovett and Martin's spring-balance muscle test, originally designed 
for the determination of the degree of recovery in muscles paralyzed 
in poliomyelitis, has been used with excellent results in our munition 
factories. This consists in measuring, by a very simple and quickly 
applied method, the strength of certain selected groups of muscles 
and computing from the figures thus obtained the total strength of 
the individual. Individuals are then classified into four groups: the 
exceptionally strong, the strong, the moderately strong, and the 
weak. The use of this test by Professor Martin under the Public 
Health Service has disclosed the fact that different specific industrial 
operations have different specific standards of strength, as is illus- 
trated by the following table : 

Operation Average Strength 

m Pounds 

Men: 

Rivet dipping 4870 

Rivet trucking 4830 

Hot forging 4370 

Rivet shoveling 4260 

Coal passing 4230 

Capstan lathe (day shift) 4180 

Planish seat 3930 

Foremen 3770 

Powder loading 3700 

1 Taken by permission from F. S. Lee, The Human Machine, pp. 6-9. (Long- 
mans, Green and Company, 19 18.) 



196 BUSINESS ADMINISTRATION 

Women: Average Strength 

Operation in Pounds 

Drilling flash holes 2370 

Mill percussion flash 1780 

Welsbach foot press 1640 

Drilling diagonal holes 1630 

It is obvious that if the strength of any worker falls much below 
the standard for the task to which he has been assigned, he is under- 
taking work for which he is not physically fitted ; and if his strength 
is markedly greater than that of his task, he is not economically 
placed. These disadvantages in assigning the worker to the task 
that is unsuited to his strength could be avoided if the spring-balance 
test should come into general industrial use. 



See also p. 144. Physical Examination of Workers. 



23. HOW INDUSTRIAL FATIGUE MAY BE DETECTED 1 

Given adequate equipment, adequate administration of the plant, 
and a proper spirit among the employees, fatigue is the greatest 
single obstacle to a maximum output. Fatigue diminishes output, 
not only indirectly, but directly by increasing accidents and the 
proportion of spoiled work and by causing sickness and absences of 
employees. It will, therefore, be profitable to employers, to employees, 
and to the nation itself, to inquire into the ways by which fatigue may 
be reduced. 

Everyone knows that a certain degree of fatigue is the normal 
result of bodily activity and is harmless. But it is not so generally 
recognized that the onset of over-fatigue may be greatly hastened, 
and that through it deleterious effects on both the worker and the 
plant may be caused by the conditions of work inside the factories, 
or by the occupation, habits, and conditions of living of the workers 
outside the factories, or by both. 

In order to be sure that an individual is really fatigued, objective 
methods of measurement must be used — one often feels tired without 
actually being so, and likewise fatigue is often present before it is 
recognized by the individual. Fatigue may be detected by various 
tests, some of which have been studied so carefully and so improved 
that they can now be considered as fairly accurate and useful for prac- 
tical purposes. Different methods are applicable to different cases. 

1 Taken from Reprint 482, United States Public Health Service, pp. 5-11. 
(Government Printing Office, 1918.) 



THE ADMINISTRATION OF PERSONNEL 197 

Amount of output. — One of the readiest means of detecting fatigue 
is by keeping a record of the output of the individual employee by the 
hour, the day, or the week and observing its course. A falling off 
in the output, when not explicable by other changes in the conditions 
of the work, indicates fatigue. Where the duration of the working 
period has been changed, fatigue can also be tested by comparing 
the average output per hour under the earlier and the later schedules. 

Amount of power used. — A fall in the amount of electrical or other 
power consumed in a factory, or one of its departments, is often an 
excellent index of decreased output and thus of the fatigue of the 
workers. Lessened consumption of power must of course be dis- 
counted where it results from temporary shut-downs or other obvious 
causes. 

Other indicators of fatigue. — Fatigue is also often indicated by 
the amount of spoiled work turned out by the workers, by the number 
of accidents to the workers occurring during a working period, by the 
number of absences from work, and in extreme cases by records of 
sickness. 

Laboratory tests of fatigue. — There are various tests of the presence 
of fatigue that have been supplied by the laboratories, some of which 
are applicable to industrial workers. These concern the muscles, 
the nervous system, sight, and hearing, and certain chemical changes 
within the body. 

See also p. 140. The Maintenance of Physical Fitness. 



24. JOB ANALYSIS 1 

The committee found that there existed a misunderstanding as 
to just what job analysis is. In some cases it was found that mem- 
bers would assert they were using job analysis when they were merely 
making a mental analysis of the various jobs and occupations in 
their establishments, and it was also found that there was a lack of 
standardization, different people using different names for the same 
job or giving the same name to entirely different jobs. 

The investigation showed the subject had three distinct phases: 
(1) job classification; (2) job analysis; (3) hiring specifications, also 
known as job specifications. 

1 Report of the committee appointed by Chicago Council, National Association 
of Employment Managers. Taken from Personnel, II (1919), 10. 



198 BUSINESS ADMINISTRATION 

Job classification is the segregation into groups, under common 
designation, of all positions requiring similar skill, training, or ability, 
and having approximately the same relative value to the industry. 

Job analysis is the systematic survey, examination, evaluation, 
and recording of the various components of a job as relating to, and 
reacting upon, the worker. 

Hiring specification is a record showing the essential requirements 
of each job, which are solely necessary for the proper selection and 
placement of an efficient worker. 

REASONS FOR MAKING AND RESULTS ACCOMPLISHED 

i. Job classification, job analysis, and hiring specifications will 
assist the employment department in the selection of employees. 

2. They furnish more accurate data than are usually available to 
explain the job to the new employee. 

3. They give information about training methods, and help to 
develop new and better methods. 

4. They furnish basic data for the development of systematic 
promotion schemes. 

5. They furnish data for the standardization of occupation and 
job names. 

6. They furnish some of the data upon which to base rate and 
wage schedules, and especially assist in the standardization of rates 
between departments for the same jobs. 

7. They will point out disagreeable features of a job as a basis for 
the improvement of working conditions. 

8. They will give a good picture of the job to those not directly 
in contact with it, but still in need of an understanding of the job or 
occupation, as nurses, doctors, compensation departments. 

9. It will bring the employment department and foremen or 
department heads together on a basis of mutual understanding 
through the close co-operation and contact necessary when making 
job classification and analysis. 

10. They will give the foreman a better understanding of the jobs, 
as he will be forced to think about them in a comprehensive way and 
not only from the viewpoint of production. Consequently the 
relationship between foremen and workmen will be closer and dis- 
agreements fewer. 

11. They will give a permanent record of the requirements for a 
job, making turnover in the employment department a less serious 
matter. 



THE ADMINISTRATION OF PERSONNEL 199 

12. They will, when more generally developed, give valuable data 
for the agencies of vocational guidance. 

13. Made on a comparable basis, they will give data to stabilize 
rates in similar industries. 

14. They may be used in the movement for the elimination of 
unnecessary fatigue. 

15. They will give data which will assist the movement for acci- 
dent prevention and sanitation. 

16. They will suggest improvements in equipment and manu- 
facturing methods. 

17. They will furnish data useful in the placement of industrially 
disabled men. 

18. They are the first steps necessary in determining the basic 
requirements in introducing any mental tests and trade tests in the 
process of proper selection and placement and careful follow-up and 
adjustment. 

JOB CLASSIFICATION 

There appears to be agreement in the various sources consulted 
that some form of classification of the jobs coming within the juris- 
diction of the employment department should precede the actual 
making of a job analysis and specification. The extent toward which 
this classification is carried differs, however, in different types of 
business. 

The following steps describe the general procedure for a prelimi- 
nary classification: 

1. Take one department at a time and list all jobs for which some- 
body is usually hired. 

2. Decide upon a distinct title for each job, using, wherever they 
are clear, titles now in use. 

3. Group jobs which are identical or very similar together under 
one title, especially those performed by the same type of employee, 
or if the job is one of several jobs of similar nature which the same 
employee performs by changing around from job to job. This will 
simplify the work of analysis, especially the specifications, as for all 
practical purposes the employment department is interested in the 
job, as it represents a type of worker for this job. 

4. Group together jobs which are of the same general occupational 
nature, such as assembling jobs, machine-operating jobs, maintenance 
jobs, etc., keeping each job distinct, however. This will facilitate 
analysis, as certain factors will affect all jobs of the same general type 



200 BUSINESS ADMINISTRATION 

5. The preliminary classification is done for the purpose of facili- 
tating the making of job analyses and hiring specifications, and should 
be general, details left to be worked out by them. 

JOB ANALYSIS 

Job analysis of all jobs listed in the classification is made on the 
basis of a definite outline, including a standard set of points to cover 
all jobs. The method of making this analysis and the various steps 
will, of course, differ in various types of organizations, due to local 
conditions, but the following points were taken from the instructions 
of one employment department investigated, to the ones making a 
job analysis: 

1. Begin with one department in your factory which is best 
known to you, and where you are sure of the co-operation of the 
foreman, assistant foreman, and other employees who may have to 
be consulted. 

2. Observe the jobs to be written up, notice what is done and how 
it is done, type of employee doing the job, working conditions, and 
any other factors shown in the outline below. 

3. Write up all you know about the job or have learned from your 
own observation, following the outline shown below. 

4. Get together with the foreman and sell to him the idea of job 
analysis, pointing out to him the value to his department in having 
you secure full knowledge of the requirements, the value it is to the 
company as a whole in furnishing information as a basis for the 
standardization of names and rates, the value to the factory, the 
safety department, and nurses in having detailed information about 
each job as to the working conditions, hazards, and any other argu- 
ments which you may feel will assist in selling the idea. 

5. Secure from your foreman as complete a statement as possible 
on all the points to be covered. Be sure to evaluate his statements 
and discriminate between facts, opinions, and bias or prejudice. 

6. If advisable, talk to the assistant foreman, die setters, linemen, 
and experienced employees about the job. 

7. Consult the master mechanic on questions of equipment, the 
efficiency man, spoilage clerk, and superintendent, getting the require- 
ments of the job from their particular angle and viewpoint. 

8. Consult the safety man as to the hazards of the job. 

9. Consult the nurse or doctor as to the health and physical 
requirements and strains they may have observed. 



THE ADMINISTRATION OF PERSONNEL 201 

10. Check at all times by observation of the actual conditions, and 
give statements of facts instead of opinions wherever possible. 

11. Write your analysis up from the above information. Give in 
as few words as possible an accurate, reliable, simple, and adequate 
description and definition. 

12. Submit to the foreman for criticisms and suggestions, and if 
finally agreed upon by the foreman and employment department, 
submit to the superintendent for final approval. 

13. The information should be written up on plain sheets of paper 
and arranged in paragraphs under the headings given below to 
facilitate easy reference to any particular points. 

The following is a list of points which are suggestive of what such 
a job analysis should include: 

1. Department and foreman. 

2. Job name. 

3. Definition of name. — By this is meant a short, concise explana- 
tion of the job name. This is often termed the duties. 

4. Description of duties. 

5. Wage scale. — a) Starting or basic wage. This should be stated 
in form used as a basis for computation, as, for example: 40 cents per 
hour, or $18.00 per week. 

b) Advancement, showing schedule of increase, where such is in 
effect, and limits, where such have been established. 

c) Piece-work bonus, or premium. Where these forms of incen- 
tive plans are in effect, take average earnings the employee can make, 
and the limits. 

d) Overtime rate, Sunday, and holiday rate. 

6. Hours per day. Per week. 

7. Continuity of employment. 

8. Promotions. Here should be stated the line of promotion, as 
well as the factors on which it is dependent. 

9. Standards of production or output, where such are available. 

10. Working conditions, as to: 

a) Ventilation h) Accident hazard 

b) Temperature i) Health hazard 

c) Illumination j) Posture 
_d) Cleanliness k) Fatigue 

e) Physical layout /) Strain 

/) General surroundings m) Distractions 

g) Fire hazard n) Monotony 



202 BUSINESS ADMINISTRATION 

ii. The effects of the job on the character of the worker. 

12. Requirements , physical and mental. 

13. Method of selection. 

14. Sources of supply. 

15. Method of training. — Here should be stated length of time 
necessary to learn the job, who gives the training, and the various 
steps of the training period. 

HIRING SPECIFICATIONS 

While the job analysis gives comprehensive information regarding 
the job to its minutest detail, it is not practicable to the busy employ- 
ment man or interviewer, who may have to memorize the information 
regarding a large number of jobs, and wishes to use the results of the 
analysis at the time of selecting and hiring a man, both for the pur- 
pose of recalling the qualifications as well as having such definite 
information as should be told the new man before he starts to work. 
It therefore was found preferable to make up a record which will 
permit tabulation of a resume of the information secured through the 
job analysis. 

See also p. 588. Measuring and Communicating Aids: Time 
Study, 
p. 591. Measuring and Communicating Aids: Classifi- 
cation and Symbols. 



25. SOME SAMPLE ANALYSES AND DESCRIPTIONS OF 

OCCUPATIONS 

A 1 

Dept Job Name 

Div Job Symbol 



Working Conditions: 








Permanent Night 


Clerical 


Standing 


Heavy 


Temporary Day 


Mechanical 


Sitting 


Medium 


Overtime Part time 


Labor 


Stooping 


Light 


Variety Quick 


Clean 


Office 




Routine Slow 


Dirty 


Shop 




Exacting Dangerous Hot 


Outside 





Personal Qualification (Qualify only those which are essential) : 

Male Age Appearance Grade school Years 

Female Height Nationality High school Years 

Weight Eyesight College , . Years 

1 Curtis Publishing Company. 



THE ADMINISTRATION OF PERSONNEL 203 

Experience: 
Special knowledge and training either with methods or machine 



Can inexperienced man be trained If so, how long will it take. 

Wage and Hours: 

Time rate Starting wage [In 1 In 

Piece rate Next advance J Hours \ Sat. \ 

Prod, bonus Time or merit \ [Out J Out 



General: 

Next opportunity 

Related jobs 

What is most common reason of exit. 



What are the duties on this job ? Necessary qualifications ? 

B 1 

BLACKSMITH 

Other names by which occupation is known: 

Occupations most nearly allied: — Anglesmith, hammersmith, toolsmith, 
shipsmith, horseshoer, forger (liner). 

Trade requirements: — A blacksmith must be capable of doing welding 
and able to make all kinds of medium or light machine and hand for- 
gings from drawings, templates, or samples; should be familiar with 
coal, coke, gas, and oil furnaces; have some experience on steam or 
power hammers; have a good knowledge of heat treatment of steel, 
including oil and water tempering and hardening. 
Education: — Common school. 

Physical requirements: — Strength and endurance; good eyesight, as 
a blacksmith's duties require him to be looking into forges or furnaces 
constantly. 

Mental requirements: — Higher than average intelligence. 
Experience: — Should have served as an apprentice in general black- 
smith shop. 

Entrance requirements for training school: — Common or high-school 
education; shouls have good health, strength, and be of robust stature. 
Rate established. 

1 Taken from Aids to Employment Managers and Interviewers on Shipyard 
Occupations, Special Bulletin, Series on "Employment Management in the Ship- 
yard." (United States Shipping Board Emergency Fleet Corporation, 1918.) 



204 BUSINESS ADMINISTRATION 

26. THE FIELD OF THE PSYCHOLOGICAL TEST 1 

The popular conception involves a process of "pigeonholing" — 
fitting an individual into an occupation which is supposed to be the 
one for which he was "cut out." This doctrine may be proved 
fallacious on several grounds. The objections may be couched in 
ethical, sociological, philosophical, or psychological terms. This dis- 
cussion will take the standpoint of experimental psychology, and 
from this aspect the objections appear especially vivid. 

A prime consideration that is neglected by the popular calcula- 
tions concerns allowances for probability of error. Errors of obser- 
vation are inevitable in all measurements. A single observation is 
less reliable than a series of observations. For this reason it is 
possible that vocational tests may require to be given several times 
in order to reduce this error to a minimum. 

A further objection to a single-test system is that it makes no 
provision for the amount of improvement which an individual is 
capable of making in a given activity. If experimental psychology 
has shown anything, it has demonstrated that capacity for improve- 
ment varies greatly with different individuals, and the initial standing 
in a test does not indicate what the standing will be in successive 
performances. This brings up the question as to how far the indi- 
vidual may be trained in an activity, and when one observes the 
astounding increases in capacity displayed in everyday life, one 
hesitates to limit the individual to any single vocational possibility. 

The current doctrine is further befogged by its neglect of the 
volitional factor in human endeavor. Behind all specific capacities 
lies something that is loosely called will, character, volition, etc. It 
has to do with the exercise of mental traits which are not directly 
measurable, at least not readily isolated. Psychological tests appear 
to be limited when one undertakes to measure such traits as industry, 
persistence, honesty, etc., and the limitations make it impossible to 
predict what reaction will take place in future situations. 

Some attempts at vocational guidance are based upon interest 
as the ultimate criterion of aptitude. In evaluating this factor one 
should keep in mind several points. First, some people have no inter- 
est of vocational significance. Here interest as a criterion obviously 
fails. Other individuals have but one absorbing interest. Into this 

1 Taken from H. D. Kitson, "Psychological Tests and Vocational Guidance," 
in the School Review, XXIV (1916), 207-14. (The University of Chicago Press, 
1916.) 



THE ADMINISTRATION OF PERSONNEL 205 

class fall the geniuses, and here interest is very properly regarded as 
an indication. In the majority of cases, however, a number of inter- 
ests are present. They may be of equal strength. They may be 
in related fields and reinforce each other, or they may be in unrelated 
fields and antagonize each other. The perplexing thing about these 
cases of multiple interests is that the individual himself is unable to 
tell which is his strongest interest. How unstable it is, then, as a 
criterion of vocational aptitude. Finally, it should be pointed out 
that interests are not always fixed things. They are extremely 
volatile. 

The psychological methods of studying interests fall under two 
heads — objective and subjective. The first involves the presentation 
of interesting stimuli to the individual and the measurement of his 
reactions. Objective methods are so slightly developed that little 
can be said on experimental grounds either for or against them. Their 
utility is questionable, however, inasmuch as the stimuli must neces- 
sarily be so simple in laboratory procedure as to have little vocational 
significance. 

The subjective method is largely used in the practice of vocational 
guidance, usually taking the form of a questionnaire modeled after the 
pattern set by Professor Parsons. This method has value when 
used under laboratory conditions, but experimental psychology has 
shown that the introspections of an untrained person are usually 
not very illuminating, at least in revealing deep motives and hidden 
desires. 

The conclusion to be drawn from the foregoing considerations is 
that any scheme of vocational guidance that uses interest as the chief 
arbiter in determining vocational fitness is on the wrong psychological 
basis. 

Vocational guidance will have to be regarded, not as a process 
whereby one is designated as fitted by birth for one occupation and 
not fitted for another, with psychological tests as the chief instruments 
of selection; a more fruitful conception of the entire process is to 
regard it as monitory in nature. The individual should be measured 
from every standpoint — physiological, psychological, sociological, and 
economic. Each of these views of the individual is only partial and 
shows his standing in relation to the world in a specific mode. All 
these views must be taken in order to ascertain his true relation. 

This view immediately disposes of the demand that the technique 
of vocational guidance be developed exclusively by the psychologist. 



206 BUSINESS ADMINISTRATION 

He is not more responsible for its advancement than is the sociologist, 
the physiologist, or the economist. The mental process constitutes 
only one phase of the occupational activity. 

In making positive suggestions as to the probable utility of psycho- 
logical tests in vocational guidance, it is difficult to speak with assur- 
ance because of the embryonic condition of mental tests. Most 
persons will agree that it is possible by means of psychological tests 
to distinguish between an individual who is characteristically slow 
and one who is characteristically fast; between one characteristically 
accurate and one characteristically inaccurate, as these characteristics 
are in extremest form. It is also possible to grade people with respect 
to the presence of certain qualities of ingeniousness, ability to adjust 
to new situations, etc. The methods for accomplishing these ends, 
however, are still far from standardized, and vast areas of technical 
ground must be covered before the tests will have vocational signifi- 
cance. 

27. METHODS IN VOCATIONAL TESTING 1 

The vocational miniature. — There is first what may be called the 
method of the vocational miniature. Here the entire work, or some 
selected and important part of it, is reproduced on a small scale by 
using toy apparatus or in some such way duplicating the actual situa- 
tion which the worker faces when engaged at his task. Thus 
McComas, in testing telephone operators, constructed a miniature 
switchboard and put the operators through actual calls and responses, 
meanwhile measuring their speed and accuracy by means of chrono- 
metric attachments. 

The vocational sampling. — Closely related to this method of minia- 
ture performance is that of taking an actual piece of the work to be 
performed and sampling the candidate's ability by his success in this 
trial. Thus, in connection with the recommendation of clerks and 
assistants from among boys in commercial high schools it is common 
to test their ability from time to time by assigning them small pieces 
of work such as that which they might later be required to perform 
in business offices and stores. Finding addresses and numbers in a 
telephone directory, carrying out involved verbal instructions and direc- 
tions from memory, computing calculations, making out a trial bal- 

1 Adapted by permission from H. L. Hollingworth, " Specialized Vocational 
Tests and Methods," in School and Society, I (1915), 918-22. (The Science 
Press, 1915.) 



THE ADMINISTRATION OF PERSONNEL 207 

ance, a trial chemical analysis, etc., are common forms of this type 
of test. 

The vocational analogy. — A third method has been that of analogy. 
Some test is devised which bears a fancied resemblance to the sort of 
situation met by the worker in the given occupational activity. The 
material is new, but the attitude and endeavor of the worker seem to 
be much the same. There is, indeed, usually a tacit or expressed 
belief that the same simple or complex mental processes or psycho- 
logical functions are involved in the two cases, although seldom has 
the precise nature of these functions been clearly stated. Thus girls 
employed in sorting ball bearings, and also typesetters, have been 
selected on the basis of their speed of reaction to a sound stimulus. 
Miinsterberg has suggested that marine officers who can quickly per- 
ceive a situation and choose an appropriate mode of reaction to it 
may be selected by letting candidates sort a deck of cards, bearing 
different combinations of letters, into their appropriate piles. The 
same investigator has described a test for motormen which, while 
being neither a miniature of their required work nor yet a sample of it, 
is said to produce in them much the same mental attitude. In another 
case telephone operators were tested for speed in cancelling certain 
letters from a newspaper page, in the belief that this work involved 
an ability that is required also at the switchboard, although there 
directed toward different materials. McComas has described a dot- 
striking test for measuring accuracy of aim and co-ordination, essential 
factors in manipulating a switchboard. 

Miscellaneous empirical tests. — Finally there are cases in which 
tests having vocational significance have been sought by purely hap- 
hazard and empirical ways. Thus Lough, having devised a form of 
substitution test in which certain characters had always to be replaced 
by certain others, according to a prescribed key, proceeded to apply it 
to groups of commercial students. Speed of improvement was chosen 
as the thing of interest in this test. Measures of this capacity, as 
shown by repeated trials with the same test day after day, were 
then compared with measures of ability in different types of work in 
which the students were engaged. It was found that the test records 
agreed very closely with the abilities in typewriting and fairly closely 
with abilities in stenography and business correspondence, whereas 
there was not such definite relation found between the test records and 
ability in learning the German language or in mathematics. The 
test is consequently recommended as a useful means of detecting 



208 BUSINESS ADMINISTRATION 

typewriting and stenographic ability. It is not pretended that the 
test is either a miniature of the work of such calling, nor that it is a 
fair sample of such work, nor even that it involves precisely the same 
mental functions that come into play in such work. The test records 
and ability in the particular type of work show high positive correla- 
tion, so that an individual who is good or medium or poor in the one 
is, as a mere matter of fact, also found to be good, medium, or poor in 
the other. Hence, without further analysis, the one may be used as 
the sign of the other. 

The miniature model has the advantage of concreteness and appar- 
ent relevance, but, as Miinsterberg points out, a reduced copy of an 
external apparatus may arouse ideas, feelings, and volitions which have 
little in common with the processes of actual life. 

The second method we have described, viz., that of using as the 
test a real sample of the work done, has certain very obvious advan- 
tages. On the other hand, for the vocational test of this type to be 
at all significant, either the sort of work involved in the occupation 
must be fairly uniform and homogeneous in all its different circum- 
stances (as in the case of typewriting at dictation, or in the work of 
filing clerks, accountants, etc.), or else there must be included a large 
number of samples, representing all the various unrelated sorts of 
work. Moreover, in neither case is the test in any peculiar sense 
psychological. Such tests could perhaps be best conducted by the 
employer himself. In fact, employment on trial, which is a common 
method of selecting operatives and assistants, is a time-honored form 
of this test, which is not necessarily improved on either by calling it 
psychological, or by putting it in charge of a general expert, or by 
removing it to the laboratory. 

The third form of procedure, that of analogy (duplicating the 
inner mental attitude), is full of all sorts of difficulties and sources 
or error, many of which are, at the present stage of our knowledge, 
irremediable. In selecting a new test which shall involve the same 
mental attitude and call for the exercise of the same psychological 
functions as are needed in the work itself, we are handicapped by the 
unreliability of the introspection of the examinee and also by our 
inadequate ability to recognize, identify, and classify psychological 
functions even when we are in their immediate presence. The state- 
ment of motormen that the manipulation of a crank in connection with 
a strip of checkered paper makes them feel quite as they do when 
guiding their cars through a crowded thoroughfare is far from a guar- 



THE ADMINISTRATION OF PERSONNEL 209 

anty " that the mental function which they were going through had the 
greatest possible similarity with their experiences on the front plat- 
form of the electric car." It is much more conceivable that the 
"mental attitude" referred to was merely the vague feeling that 
"Something is happening now," "This keeps me busy," or "What a 
nuisance this thing is." And even if we knew the mental functions 
involved, as would be demanded by the method of the vocational 
psychograph, we are still a long way from the time when we can 
exhibit even a single psychological test and state just what function 
or functions its performance does or does not, may or may not, involve. 
Indeed, we do not even know what the various distinct mental func- 
tions are, or whether, as a matter of fact, there are such distinct 
functions. 

After all, the miscellaneous, random, and purely empirical method 
of Lough, Lahy, and Woolley seems to be the most promising experi- 
mental procedure for the immediate present and perhaps for some time 
to come. This method is, to be sure, but a rough, provisional, and 
unanalyzed expedient. It calls for long and patient co-operative 
labor. It does not at once afford us the systematic scientific insight 
which we may wish we possessed. But it will at least save us from the 
delusion that we already possess such insight, and it should serve to 
check the fervent and quasi-religious zeal that leads us to mistake 
prophecy for service. 

28. ARMY INTELLIGENCE TESTS AND TRADE TESTS 1 

[The reader should keep in mind the fact that the intelligence 
tests here discussed were given to ascertain the general level of 
ability. They did not seek to measure specific abilities.] 

In determining the qualifications of men coming into service, the 
army used the physical examination, the interview, the intelligence 
test, and the trade test. The interview and the physical examination 
are familiar devices to the employment manager, and so, although 
there are many points of interest connected with the use of these 
methods in the army, little more will be said about them here. The 
intelligence test and the trade test are probably more novel; certainly 
they have not come into general use as yet in industry. 

1 Taken by permission from Beardsley Ruml, "The Extension of Selective 
Tests to Industry," The Annals of the American Academy of Political and Social 
Science, LXXXI (19 19), 39-46. 



2IO BUSINESS ADMINISTRATION 

The army intelligence tests were devised and used by the army so 
that information concerning each man's mental alertness might be 
at hand to aid in assigning him to duty. The actual form which the 
tests took was determined to a large extent by several aspects of the 
army situation. In the first place, the tests had to be given with 
great speed. It was not uncommon to test and to report on 2,000 
men within a space of twenty-four hours in a single camp. In the 
second place, the tests were scored by a staff that was of necessity 
continually changing. And finally, the method of testing had to be 
so adapted that men who could not speak or read English might be 
satisfactorily rated. 

As a result of these tests each man received a lating: A for the 
very superior; B for those decidedly better than the average; C+, 
C, and C— for those of average ability; D and D— for the inferior; 
and E for those who did so poorly in the test that arrested mental 
development was suspected. 

The ratings of mental alertness were useful in three ways. In the 
first place, they indicated those individuals of such inferior mental 
ability that their presence in a unit would retard training, to a prohibi- 
tive degree, men who might even become a menace to the unit in 
critical situations. Such men were either assigned to routine tasks 
which they were competent to perform or they were discharged from 
the army. In the second place, the ratings showed men of superior 
grade who might be considered for advancement. They pointed out 
to a commanding officer certain individuals for his special observa- 
tion, sometimes with startling results. In the third place, the rat- 
ings were used to equalize the alert and the sluggish in the companies 
of a regiment. It was found that if men were assigned to companies 
in a hit-or-miss fashion so far as mental ability was concerned, some 
companies of the regiment could be trained with great speed, while 
the training of others seemed impossible. It was found that these 
differences were paralleled by differences in the average ratings of 
the companies, and after shifts in personnel were made which equalized 
the average intelligence ratings, the training of the regiment as a 
whole proceeded in a decidedly more satisfactory way. 

The uses made of intelligence tests in the army suggest that 
similar tests might be of considerable value to industry. The first 
use that at once suggests itself is in relation to hiring. Mental alert- 
ness is clearly an attribute that brings about success or failure at 
different kinds of work, and the employment manager who will 



THE ADMINISTRATION OF PERSONNEL 211 

inform himself of the amount of intelligence that various jobs require 
can assure himself that each applicant is at least intelligent enough so 
that he will suffer no handicap in becoming a satisfactory employee 
because of a slow or retarded mentality. The converse is also true, 
that applicants of superior intelligence need not be hired for positions 
in which high mental ability may be either unnecessary or misdirected. 

The usefulness of intelligence ratings only begins with the hiring 
of the applicant; they may be of considerable importance in readjust- 
ments in the working force itself. Clearly, in slack times when the 
laying off of groups of men becomes imperative, care might be taken 
that mental ability in its relation to productivity be given its proper 
weight in deciding which individuals shall stay and which shall go. 
In conditions where the manufacture of a new product involving 
new processes and technical operations is begun, those men on the 
present force whose mental alertness gives indication of quick adapta- 
bility to new work and unfamiliar situations might be selected. 
When it is desired to select or to encourage certain of the less skilled 
operators to study in the company's technical schools, better results 
would be obtained by choosing those whose intelligence rating gives 
promise of quick learning and an appreciation of the advantages of 
special training. 

The practical applications of intelligence tests so far mentioned 
are perhaps fairly obvious. A further use, somewhat less certain of 
immediate value, is suggested from the value of army intelligence 
tests in balancing the companies of a regiment. It is conceivable 
that such balancing would not only be profitable from the point of 
view of immediate production, but that a major cause for industrial 
unrest and discontent would be attacked. 

Great care must be taken to make sure that any intelligence test 
proposed for use in industry is really able to do the work expected of 
it. There is danger that inexperienced enthusiasts, wholly uncon- 
scious of test technique and test limitations, will offer broadest 
panaceas for all the difficulties of mental measurement. It should 
be remembered that the army intelligence tests measure general 
mental ability, not specific mental traits. It should also be borne 
in mind that the success of the army tests was due to the great range 
of mental ability received by the army. Parallel results have never 
been achieved where tests have been used as a selective agency, on a 
group of relatively small intellectual range. Further, the army 
tests, determined as they were by the fixed conditions of military 



212 BUSINESS ADMINISTRATION 

affairs, are probably not the most satisfactory kind of tests for indus- 
trial use. 

The army trade tests are quite a different story. Among the 
various items which were recorded on each soldier's qualification 
card were the very important ones concerning his occupation in civil 
life and his proficiency in these occupations. The information on 
these points was at first extracted by means of an interview. It 
was soon discovered that the interview was unreliable, not hope- 
lessly so, by any means, but just unreliable enough to give cause for 
trying to improve the system. The reason for the inaccuracy was 
not lack of training on the part of the interviewer; it was rather the 
weakness that inheres in the best conducted of interviews. Soldiers, 
like all men, are unable to judge accurately of their own ability; 
sheer mendacity was fairly prevalent, especially when there was a 
tip that this trade or that was required in France; and honest mis- 
understandings were frequent. 

Trade tests seemed to be a way of bettering the situation, tests 
that would check up a man's statement of what his occupations were 
in civil life and of what he claimed his skill to be. As in the case of 
the intelligence tests, trade tests had to fit into the army scheme of 
things. This meant that they had to be given in a short time, not 
to average more than ten minutes per test, that they be given by 
examiners who might have no knowledge of the trade whatever, and 
that they require none of the expensive machinery and equipment 
that is the complement of most trades. [The tests were of three 
kinds, (a) oral, made up of certain "key" or diagnostic questions (b) 
picture, where questions were based on picture shown, and (c) per- 
formance tests when the person being tested made some object 
requiring skill in the basic operations of the trade.] 

Several applications of the trade-test method to industry are 
suggested from its uses in the army. The three phases of employment 
work that seem most immediately concerned are hiring, transfer, 
and training. Trade tests have an immediate and obvious use in 
industry in aiding in the selection of new employees. They are the 
natural method of securing very essential occupational information, 
of ascertaining whether this particular applicant really has the skill 
that his age, experience record, and last wage seem to indicate. 
Certainly a direct method of measuring trade ability is to be pre- 
ferred to an indirect method of inferring it. 

Since trade tests can be constructed which will measure profi- 
ciency in the various activities that are commonly implied by the 



THE ADMINISTRATION OF PERSONNEL 213 

name of an occupation, they would be valuable in all matters involv- 
ing shifts in the working force. A knowledge of each man's strengths 
and weaknesses within the broad range covered by his trade would 
make more intelligent and less uncertain the transfer of particular 
men to different work. The trade-test rating should also be one 
factor in determining which workers should be retained in dull 
periods, for the nucleus that is left in the industry after the cut is 
made is the cornerstone of the new operative unit. It is important 
to know that, from the technical side, the stronger elements of the 
old unit are included in this foundation. 

The information that would be given in the trade-test record is 
intimately connected with the educational program of an industry. 
Isolated weaknesses in the chain of an individual's technical strength 
may be removed. Furthermore, a systematic program directed to 
prevent stagnation on the job would give to industry an increasingly 
flexible and effective working force and would give to the worker 
the pride in his skill which comes from watching its continuous 
growth. 

Again the warning against the amateur must be sounded. Not 
even the trade tests used so successfully in the army are capable of 
yielding the results pictured above. Only through experimentation 
will the ultimate goal be reached. Army trade tests have done their 
part in pointing out the way which may be followed. 

The intelligence tests and the trade tests are part of one tech- 
nique. Both have for their function the measurement of phases 
of human qualifications that are vitally important in the selection 
of employees, in their assignment to work, in their transfer from 
department to department, and in further education and training. 
The intelligence test gives a rating of general mental ability; the 
trade test gives a rating of specific technical skill. The two together 
picture an individual's status in those traits which most definitely 
condition his effectiveness in industry. 

29. WHAT PHRENOLOGY AND PHYSIOGNOMY CAN 

CONTRIBUTE 1 

Underlying all of the various phrenological systems were four 
common assumptions which, briefly stated, were: 

1. That such cerebral localization as exists is of fundamental and 
specific traits of character or types of ability, such as secretiveness, 

1 Adapted by permission from H. L. Hollingworth, Vocational Psychology. 
(D. Appleton and Company, 191 7.) 



214 BUSINESS ADMINISTRATION 

circumspection, love of babies, generosity, veneration, constructive- 
ness, etc. 

2. That the more developed any one of these given traits is, the 
larger will be the supposed area of the brain which contains its 
supposed organ. 

3. That, since the skull fits fairly closely to the brain surface, the 
relative development of a given portion of the brain will be indicated 
by the relative prominence or size of the different parts of the cranium, 
so that the degree of possession of the trait may be judged from an 
examination of the exterior of the skull. 

4. That the occasional casual observation of coincidence between 
particularly marked mental qualities and particular cranial character- 
istics is a sufficient basis for inferring universal and necessary con- 
nection between these two features. 

Each of these assumptions involves obvious error and misappre- 
hension in the light of what is now known concerning the nature of 
the human mind and the structure and functions of the brain. In 
order that these fallacies may be clearly disclosed the four main 
assumptions will be examined independently in the order in which 
we have here presented them. 

1. In the first place, the only sort of localization of functions that 
has been authentically established is the projection, upon the brain 
structure, of the other parts of the organism, and the localization of 
sensory-motor centers which function in the connection of these 
various organs. Thus it is known that each of the principal groups 
of muscles of the body has its so-called center in the brain. The 
same thing is true of the sense-organs, as the eye, ear, etc. Each 
incoming sensory nerve tract runs to or through some portion of the 
brain. The cortex, or outer surface of the brain, may thus be con- 
ceived as a sort of terminal station for nerves from other portions of 
the organism, a sort of projection-center which enables them all to 
take part in a functional unity of action. The functions which can 
be said in this sense to be localized in the brain are such sensory-motor 
capacities as the ability to raise the right arm, the ability to balance 
the body when standing erect with eyes closed, the ability to see, 
the ability to move the eyeball, the ability to feel pain in a certain 
area of the skin, the ability to articulate words, to understand spoken 
or written language, to call up a visual memory of a particular thing 
previously seen, etc. 



THE ADMINISTRATION OF PERSONNEL 215 

The integrity of various parts of the brain is essential to the proper 
co-ordination of all the sensibilities and responses of the individual. 
Traits of character and types of ability, however, depend on the 
characteristic modes of reaction of the organism as a whole to the 
factors of its environment. Thus generosity as a human trait does 
not depend on the massiveness of any set of muscles, nor on the keen- 
ness of any sense-organ, but upon the characteristic type of reaction 
and motivation which the individual as a whole displays. Jealousy, 
love of children, destructiveness, etc., are characteristic modes of 
behavior of the whole organism, and depend upon reactions which 
the given situation evokes, and not upon some special organ. 

2. As to the supposed correspondence between size and func- 
tional capacity, no evidence has been presented which demonstrates 
that even the strength of a muscle or the keenness of a sense-organ 
depends in any way on the absolute size of the brain-area concerned 
with it. Nor has evidence been presented to prove the existence, 
within any given species, of correlation between volume, shape, or 
weight of the brain-tissues and even the more general traits of 
character or ability. In the absence of such evidence we are led to 
believe that functional capacity depends on complexity of structure, 
chemical, molecular, and functional, rather than on the factors of 
mass or shape. But even the nature of these correlations is as yet 
largely unknown. The important point in the present connection 
is that, for the purposes of vocational psychology, the practices of 
phrenology are based on evidence no more relevant to its pretensions 
than were the "proofs" pointed to by palmistry, horoscopy, and 
prenatal magic. Through cranial measurements alone it is impossi- 
ble to determine with certainty the race, age, sex of an individual, or 
even, indeed, whether he was a prehistoric savage, an idiot, or a 
gorilla. 

3. As for the third assumption of phrenology, namely, that brain 
development is reflected in the cranial size or protuberances, it should 
be sufficient to point out that even if this were so it would be mean- 
ingless for our purpose, since we are compelled to abandon the belief 
in a relation between mass of tissue and even the simplest sensory or 
motor capacity. But such further disproof as may be required is 
readily furnished by an actual attempt to remove from their cranial 
boxes the brains of various animals, and by noting that the shape and 
thickness of the bones gives little indication as to whether brain tissue, 



216 BUSINESS ADMINISTRATION 

cerebrospinal fluid, or supporting tissues are to be found underneath a 
given protuberance or depression. 

4. The fourth assumption of phrenology, that sparse and casual 
observation of striking cases is sufficient ground for generalization, 
we should be able to dismiss at once as utterly inadequate and mis- 
calculated. It is impossible to find consistent recorded instances 
in which groups of individuals, selected at random, with definitely 
determined and measured mental or moral characteristics, have been 
shown to confirm, by their cranial geography, even the most elemen- 
tary doctrines of that phrenology which still offers to diagnose the 
individual's psychic constitution and to commend to his future con- 
sideration the vocation of engineering, publishing, or preaching, as 
the case may be. Very often practicing phrenologists and phre- 
nological vocational experts seek to justify their operations and 
pretensions by pointing out that they do not rely solely on the 
cranial geography, but more often on other characteristics of the 
individual's body, such as the concavity or convexity of his profile, 
the shape of his jaw, the texture of his skin, the shape of his hands, 
the color of his hair and eyes, the proportions of his trunk, etc. 

There is a very widespread belief that many mental and moral 
characteristics betray themselves in special facial items. The shift- 
ing eye, lofty brow, massive jaw, thin lips, large ear, protruding or 
receding chin, dimple, wrinkle, tilted nose, thin skin, prominent veins, 
and many other characteristics have come, in fiction and in table- 
talk, to symbolize specific characteristics. The same thing is true of 
the shuffling gait, the erect body, the protruding paunch, the curved 
shoulders, enlarged knuckles, stubby or elongated fingers, the short 
neck, the long arm, and the manner and rate of stride. It is but a 
step from these to the signs afforded by clothing, its selection, care, 
and mode of wearing. 

1. It is first of all true that many of these marks are the result of 
habitual activity, and in so far as they originate in the expression of a 
trait, they may be said to be signs of it. That the studious come to 
be round-shouldered, the cheerful have smooth countenances, the 
guilty to have furtive eye-movements, may well be expected. But 
it is quite another thing to reverse the proposition and to take stooped 
shoulders as a universal sign of academic interests, dimples as a sign 
of guilelessness, and nystagmus as the symptom of a criminal past. It 
is, however, often safe to use these traits as reliable signs of the estab- 



THE ADMINISTRATION OF PERSONNEL 217 

lished general habits and attitude which they express. We have all 
done this since earliest childhood; yet any attempt to classify for- 
mally the signs and effects of habit and constant expression would 
be pedantic. 

Somewhat more hopeful is the reliance on expressive movements 
as indicative of passing and transient emotional states and attitudes. 
Prolonged intimate acquaintance with an individual's emotional 
experiences and expressions may in time reveal to such an observer 
the deeper lying and more permanent affective trends, the moods 
and sentiments which indicate what we are accustomed to call the 
temperament of the individual. Insight into the nature of these 
expressive movements is one of the useful things to be derived from 
long and patient study of human nature, both at first hand and 
through the classical descriptions of emotional expression. The more 
one observes and the more individuals he observes, the more he is 
impressed with the final variety and informal complexity of these 
expressive movements, and their dependence on a vast detail of 
circumstance, which again forbid rule-of-thumb formulation. 

2. Another apparent source of these beliefs is in analogy. The 
clammy hand, the fishy eye, the bull neck, the " blotting paper" voice, 
the asinine ear, the willowy figure, the feline tread, and scores of such 
phrases indicate that these characteristics remind us definitely of 
various species or objects other than the human being, and that we 
expect to find back of them the characteristic traits, habits, and 
instinctive tendencies of those species. We seldom proceed so far as 
to check up our expectations with facts, under controlled conditions. 

3. The affective value of these analogies and their incorporation 
in poetry, song, and fiction as adequate figures of speech lead us to 
react to these traits in ways determined largely by the traditional 
usage. We are humble before the " high-brow, " merry in the pres- 
ence of the dimpled, cautious and prudent before him of the shift- 
ing eye. 

4. Another source of these notions is mainly responsible for such 
of them as refer to definitely undesirable traits. This is the belief, 
so well played upon by the school of Lombroso in criminology, that 
many of these characteristics, along with the so-called physical 
stigmata, are indicative of a degenerative or atavistic trend in the 
constitution of the individual. Suffice it to say that we now under- 
stand that the underlying truth of the matter is only that these 



218 BUSINESS ADMINISTRATION 

stigmata are somewhat more frequent among the vicious, degenerate, 
and defective groups than they are among people selected on the basis 
of their morality and intelligence. The criminally inclined individual 
may possess no stigmata, while an Abraham Lincoln may possess 
several of them, and in marked degree. 

5. A further source of these physiognomic beliefs may be dis- 
cerned: namely, the fact that the features of a stranger are very 
likely to call more or less clearly to our memory some other acquaint- 
ance whose traits we know, to our sorrow perhaps, and whose features 
or manner or voice or apparel chance to be very similar to that of 
the stranger. At once we are inclined to endow the stranger with the 
character of the individual he resembles. We seldom accurately check 
up these impressions on the basis of subsequent discovery. Indeed 
we are much more likely to evoke the suspected traits by our own 
attitude and by our treatment of the stranger, and we are eager to 
pounce upon any act that may be construed as a confirmation of 
our snap judgment. It is obvious that these impressions will vary 
from individual to individual and that any attempt to formulate them 
would expose their fallaciousness. 

Finally, in this analysis of the origin of our belief in the signs of 
physiognomy, is the mere insistence that as a matter of fact there 
are definite relationships discoverable and formulable between typical 
features and typical characteristics o. personality. Beliefs of this 
dogmatic kind are most likely to be exploited by the professional 
counsellor, since they appear to the examinee to be unknown, mysteri- 
ous, esoteric facts. 

We must content ourselves on this point by insisting that the 
formulated facts of physiognomy are so unsupported, contradictory, 
and extravagant that the vocational psychologist cannot afford to 
trifle with them. General impression on the basis of the totality 
of an individual's appearance, bearing, and behavior we shall always 
tend to receive. Whether one judges more accurately by an analytic 
recording of each detail or by ignoring these in favor of his own more 
or less unanalyzed total impression has never been demonstrated. 
Under any circumstances one is likely to look about for such details 
as may lend support to the total impression. But it is quite un- 
justifiable — though perhaps commercially expedient— to pretend that 
the judgment is really based on the details selected. 



THE ADMINISTRATION OF PERSONNEL 219 

30. THE APPLICATION BLANK AS A MEASURING 

DEVICE 1 

In order to arrive at some definite conclusions as to the questions 
asked on such blanks, the application blanks of twenty-five firms, 
each employing 1,000 or more people and representing a wide variety 
of industries, were analyzed as indicated in the following table. 

In addition to the questions appearing in the table, two of the 
blanks contained numerous "self-analysis questions" and portions 
to be filled out by the employment supervisor, patterned after the 
forms advocated by a certain widely advertised system of selecting 
employees. 

Questions in the table are arranged in order according to the 
number of times used. 

Group I. Questions appearing on eleven or more of the twenty-jive blanks: 

1. Give your full name and address. 

2. What is your age ? (Or give the date of your birth.) 

3. Date of this application. 

4. Are you married ? 

5. Give the names and addresses of your former employers. 

6. How long were you employed in each of your former positions ? 

7. What has been the nature and extent of your education ? 

8. What is your nationality ? 

9. For what position are you an applicant ? 

10. Why did you leave each of your former places of employment ? 

11. What persons (or how many persons) are dependent upon you for 
support ? 

12. What wages did you earn in each of your former positions ? 

13. What is your height and weight ? 

14. Give the names of references other than your former employers. 

15. Have you been employed by this company before ? 

16. How many children have you ? 

Group II. Questions appearing on five to eleven of the blanks: [Omitted]. 
Group III. Questions appearing on two to five of the blanks: [Omitted]. 

Where the blanks could be checked up with the practice of the 
firms in hiring, there was ample evidence that answers to many of 
the questions on the more complicated blanks were not considered 
of much value. It is plain that a considerable number of the ques- 
tions in the above table could be of no possible significance to most 

Adapted by permission from R. W. Kelly, "Hiring the Worker," in 
Industrial Management, LIII (191 7), 1-16. 



220 BUSINESS ADMINISTRATION 

firms. One employment executive states that the following points 
are the only ones deemed essential in his department: 

Name and address 

Date of application 

Date and place of birth 

Date of immigration, if foreign born 

Parentage 

Languages spoken 

Education 

Whether married or single 

Number in family 

Wage contribution to family support 

Record of previous employment 

On the whole, the practice of the most successful employment 
departments would seem to indicate that such a thing as a ''standard 
application blank" is not desirable. Very little has been accom- 
plished, even by firms engaged in similar lines of work, by way of 
standardizing their record forms. Several large companies employ two 
or more different application blanks for employees engaged for entirely 
dissimilar occupations, as for office and factory help. 

31. THE INTERVIEW AS A MEASURING DEVICE 1 

In a small concern it will be necessary for the employment man- 
ager to interview the majority of the applicants, and even in large 
establishments he may be called upon to select employees for certain 
positions or departments. There appears to be a tendency in the 
direction of selecting for employment managers men who have had 
extensive shop experience but very little education. The success of 
concerns that have tried the opposite method 01 choosing persons 
who have had a few years' contact with industry and a considerable 
amount of technical or professional education proves that the latter 
type of qualification gives much better results. 

An examination of the work done by an interviewer in any large, 
well-organized service department reveals the need for a similar 
kind of preparation. Too much emphasis cannot be placed upon 
the necessity for having some practical experience in shop or factory 
work. This ought, if possible, to have been done under the urge of 
economic necessity; otherwise the point of view of the worker is 

1 Adapted by permission from R. W. Kelly, Training Industrial Workers, 
pp. 221, 224-25, 238-39. (The Ronald Press Company, 1920.) 



THE ADMINISTRATION OF PERSONNEL 221 

never completely grasped. The interviewer who has spent a good 
many years at his trade comes by a kind of intuition to recognize 
those who are well qualified in his line. Like the prosperous business 
man without special training who makes no use of modern methods 
of accounting and investigation, he succeeds in spite of his limitations 
and may in the long run make very few serious blunders. 

It is a mistake, however, to suppose that a knowledge of the job 
alone will enable the tradesman to select others for it. There are so 
many other factors which enter into his work as an interviewer and 
which help him to become proficient that general educational quali- 
fications ought not to be neglected. He can acquire a sufficiently 
thorough knowledge of the positions to be filled in a relatively short 
time if he has the intelligence and training which fit him to collect 
and organize new information. The ideal qualifications for an 
interviewer may be summarized as follows: 

i. Personal characteristics: patience; sympathetic attitude to- 
ward employees' personal problems; tact in dealing with others; 
accuracy in making records; alertness in following clues and drawing 
conclusions; originality in questioning difficult cases. 

2. Experience in several different kinds and grades of work. 

3. High-school preparation or the equivalent. 

4. Intimate knowledge of the various tasks and working condi- 
tions in the firm or firms for which he hires. May be gained by: 

a) Working in various departments. 

b) Writing job specifications, making time studies, or doing 
other work on a part-time basis. 

c) Frequent visits to the plant during slack hours. 

5. Intimate acquaintance with foremen, department heads, and 
minor executives. 

32. SOME ASPECTS OF RATING SCALES 1 

Discrepancies are to be found in the marks of school teachers 
everywhere, the widest differences appearing in the judgments of any 
group of instructors who are asked to mark the papers of students 
in any subject. It may therefore be expected that much greater 
differences will appear in judging persons in such abstract or complex 
matters as "personality," "initiative," "co-operation," or "general 
value to the concern." 

1 Adapted by permission from R. W. Kelly, Training Industrial Workers, 
pp. 282-84. (The Ronald Press Company, 1920.) 



222 BUSINESS ADMINISTRATION 

Several methods suggest themselves' by which this tendency can 
be overcome. The United States Army has made use of a method 
for rating officers which offers a fairly successful solution. Each 
rating officer makes out his own scale in the following manner. 
Five general headings have been selected under which the ratings are 
given. Under each of these heads the rating officer places the names 
of five officers of his acquaintance, arranging their names in order as 
shown in the accompanying scale. In rating subordinates, the officer 
then compares any given case with the men whom he has selected 
as his standards. Those who have used this scale claim that, because 
it calls attention separately and consecutively to each of several 
essential qualifications for an officer, it lessens the danger that 
judgments may be based on minor defects, with a corresponding dis- 
regard of important characteristics. Officers are especially asked to 
avoid the error of rating low in all characteristics a subordinate 
whom they hold in disapproval for any reason, or rating high in all 
characteristics a subordinate whom they admire for any special 
cause. To obtain the total rating for a subordinate, his ratings in the 
five separate qualities are added up. Anyone who equals the 
" highest" officer in the rating scale in all of the five characteristics 
thus receives a total of ioo points, and one who equals the " lowest" 
receives only 20 points. 

The few experiments made by psychologists which can throw 
light on the qualities which ought to be listed in such a scale seem to 
indicate that there is some divergence in the ability to judge a trait 
in others according to whether or not one possesses it himself. Thus 
one's judgment of neatness, intelligence, humor, or refinement in 
others is likely to be reliable if one possesses these traits. Similarly, 
vulgarity, snobbishness, and conceit in the rating officer render his 
judgments of these characteristics in others quite unsatisfactory. In 
the same way it appears that there is a fairly close agreement as to 
judgments of efficiency, originality, or quickness, while there is likely 
to be little or no agreement among observers as to such traits of 
character as unselfishness, integrity, co-operativeness, cheerfulness, or 
kindliness. 

The experience of educators has quite clearly demonstrated the 
futility of attempting to mark on a scale of more than ten divisions. 
Five divisions probably answer all practical purposes and are more 
certainly within attainable limits of accuracy. 



THE ADMINISTRATION OF PERSONNEL 223 

THE RATING SCALE CARD USED BY THE UNITED STATES ARMY 

I. Physical Qualities: 

Physique, bearing, neatness, Highest: Capt. John Doe 15 

voice, energy, endurance. High: Capt. H. Black 12 

Consider how he impresses Middle: Capt. R. White 9 

his command in these Low: Capt. W. Smith 6 

respects. Lowest: Capt. E. Jones 3 

II. Intelligence: 

Accuracy, ease in learning; Highest: Capt. R. White 15 

ability to grasp quickly the High: Capt. B. Gray 12 

point of view of commanding Middle: Capt. W. Smith 9 

officer, to issue clear and Low: Capt. J. Brown 6 

intelligent orders, to estimate Lowest: Capt. E. Jones 3 

a new situation, and to arrive 
at a sensible decision in a crisis. 

III. Leadership: 

Initiative, force, self-reliance, Highest: Capt. B. Gray 15 

decisiveness, tact, ability to High: Capt. John Doe 12 

inspire men and to command Middle: Capt. R. White 9 

their obedience, loyalty, and Low: Capt. W. Green 6 

co-operation. Lowest: Capt. R. Blue 3 

IV. Personal Qualities: 

Industry, dependability, loy- Highest: Capt. H. Black 15 

alty; readiness to shoulder High: Capt. W. Smith 12 

responsibility for his own acts; Middle: Capt. R. White 9 

freedom from conceit and Low: Capt. A. Old 6 

selfishness; readiness and abil- Lowest: Capt. J. Young 3 

ity to co-operate. 

V. General Value to the Service: 

Professional knowledge, skill, Highest: Capt. R. Day 40 

and experience; success as ad- High: Capt. H. Night 32 

ministrator and instructor; abil- Middle: Capt. R. Roe 24 

ity to get results. Low: Capt. A. Old 16 

Lowest: Capt. R. Blue 8 

RATING SCALE FOR FOREMEN 

I. Trade Ability: Compare nature and extent of trade experience; 
skill in using tools or machines; technical information; knowledge of 
related trades or processes. 

II. Production: Compare ability to plan and get work out on schedule 
time; production costs; maintenance of department; quality and quantity 
of output. 



224 BUSINESS ADMINISTRATION 

III. Administration: Compare tact and fairness in dealing with 
employees; success in making occupational adjustments; discipline, esprit 
de corps of employees, special efforts to build up a stable working force; 
sanitary condition of department; accident record. 

IV. Training: Compare willingness and ability to teach beginners; 
efforts to improve employees through instruction; co-operation with train- 
ing department. 

V. Special Executive Qualifications: Compare years of service; loyalty; 
knowledge of company's policies; co-operation with other departments and 
with higher executives ; promptness and accuracy in making out reports; 
initiative; resourcefulness; self-control. 

33. THE LABOR AUDIT 1 

The labor audit is a reasonably exhaustive and systematic state- 
ment and analysis of the facts and forces in an industrial organization 
which affect the relations between employees and management, and 
between employees and their work; followed by recommendations 
as to ways of making the organization more socially and humanly 
productive and solvent. 

Managers are familiar today with various types of accurate cur- 
rent reports regarding different phases of factory activity. There 
are elaborate balance-of-stores records, elaborate production records, 
and analyses of selling conditions. But as yet most managements 
have not developed well-organized methods for recording or under- 
standing the elements which go to make up what is in many businesses 
one of the largest classes of expense, namely, the labor costs. 

[The subject-matter to be covered in the labor audit is indicated in 
section (/) of Selection 1. This material should be carefully reviewed 
with the query "What would be dealt with or audited on this topic" 
continually in mind.] 

It will be helpful if the practical uses of the labor audit are sum- 
marily considered from four points of view — the uses to the general 
management, to the personnel manager, to the workers, and to the 
community. [The last two are omitted here.] 

A. Uses to the management. — The audit is obviously useful to the 
management as a method of standard record and careful analysis; 
but other uses at once suggest themselves. 

The material incorporated into individual sections, together with 
the recommendations, can profitably be made the topic for discussion 

1 Adapted by permission from Ordway Tead, The Labor Audit, pp. 7, 8, 42-45 
(Federal Board of Vocational Education, 1920). 



THE ADMINISTRATION OF PERSONNEL 225 

and for educational work in executives', foremen's, and workers' con- 
ferences. In a plant already well functionalized the different sections 
of the report would naturally be turned over for action to the execu- 
tive charged with the responsibility for the function under considera- 
tion. But more than this is necessary. The audit has been made 
from the point of view of assessing the all-around human and social 
solvency of the organization or institution. And to the extent that 
this all-around point of view can be imparted to members of the 
executive staff by reading and discussing certain portions, if not all, 
of the audit, to that extent the broadest educational purposes will be 
served. 

It will also be true, where a personnel department is in operation, 
that the audit can to a certain extent give the management a good 
estimate of its working efficiency. It can, in other words, be an 
audit of the personnel department. But it should be more than 
simply a statement. It should be definitely a working manual which, 
in the hands of all the personnel executives, can be used as suggestive 
of a point of view and of new methods. 

Where new executives are being introduced, both into general 
executive work and into the personnel department, it is very con- 
venient to have in fairly compact compass a statement that makes 
clear how the company's labor policy is operating. If a labor audit 
is turned over to such new executives to read they can be more 
quickly instructed in the policy and methods under which the com- 
pany operates. As a document for the instruction for new executives 
the audit can have peculiarly significant values. 

Again, the conscientious and enlightened employer, who is appre- 
ciative of his social responsibility, should be able to find in the audit 
an estimate of the human solvency of his business. He should be 
able to get a clear picture of the problems that remain for the plant 
to solve, of the immediate steps that he should take toward their 
solution, and of the larger problems he should have in mind to work 
on over a period of years. 

B. Uses to the personnel manager — From the point of view of the 
personnel manager, the labor audit has certain values which are to 
be obtained in no other way: (t) It enables him to know all the ele- 
ments of his problem. This knowledge of the all-around aspects 
of the situation with which he is dealing is indispensable for the 
forming of a right and adequate policy. (2) It enables him to frame 
and suggest a policy which is calculated to meet his problem in a 



226 BUSINESS ADMINISTRATION 

# 

fundamental way. (3) It enables him to sell his policy to the organi- 
zation with the maximum effectiveness. (4) It enables him to carry 
on his own administrative work with greater success because of his 
greater knowledge. And (5) it enables him to improve his policy 
and practice because of the estimate of its effectiveness he has secured 
in the audit. 

And further use of a different sort should be mentioned. The 
personnel manager may, if he is casting about for a method of filing 
the flood of pamphlets and clippings on employment work which 
pour upon him, find that the topical arrangement of the audit with 
its subtopics affords a convenient method of filing. 



See also p. 126. Another Statement of Functions. 

E. Organization and Administration of the Personnel 

Department 

We have reached the stage in our study where we may profitably 
canvass again the organization of the personnel department. What is 
the appropriate organization of this department ? How should it be 
related to the rest of the business organization ? What spirit should 
animate its director and his staff ? 

To these questions certain general answers may be made. 

1. Administration of personnel in a given plant should be in 
terms of the conditions and problems facing that particular plant. 
A successful personnel administration in one line of activity might 
well be only moderately successful or even a complete failure in 
another line. An organization scheme admirably adapted to the 
administration of labor in the British Ministry of Munitions might 
well be quite unsuccessful if applied to an engineering firm or to a 
university. An administrative organization well fitted to the needs 
of a street-cleaning department might well make terrible failure if 
transplanted to a watch factory. There doubtless are certain general 
or common considerations applicable to all personnel work in the 
fields of individual and social psychology and in the economic analysis 
of the functioning structure of our industrial society, but the per- 
sonnel manager who faces the task of organizing a personnel admin- 
istration for a particular business unit must do so in terms of the 
special problems of that unit, recognizing of course the setting of 
these problems in our social structure as a whole. 



THE ADMINISTRATION OF PERSONNEL 227 

2. Administration of personnel should be vastly more than a 
congeries of unco-ordinated, miscellaneous labor practices. It should 
be founded on principles; should be aimed at some definite goal. 
True, the personnel manager is such a recent arrival in the mana- 
gerial family that his guiding principles are as yet none too well 
formulated. We have seen in another connection that the first 
hundred years following the industrial revolution was a period in 
which technology was emphasized. The human factor in industry, 
while by no means completely neglected, was certainly not carefully 
studied. Its careful study is, indeed, a matter of the present genera- 
tion. Such a situation makes it all the more important that the 
manager of personnel visualize his goal as vividly as may be. He 
will administer his task as a coherent whole only as he sees it directed 
toward some such goal as "good output" and this in terms of the 
conditions precedent and prerequisite (see p. 128). Such a point of 
view gives personnel work a unifying thread — indeed it is the sadly 
needed backbone. The gain is not confined to the mere articulation 
of personnel work. This articulated agency has before it a straight 
road to travel; it no longer flounders about the fields. This means 
that the progress of personnel work in a business becomes measur- 
able; achievements can be set over against expenditures in a somewhat 
definite way. Furthermore, since there is a road to travel, it becomes 
possible to tell when personnel work is "off the road." In other 
words, a sense of balance and proportion is attained. One can even 
picture a personnel manager who is not frantically absorbed in calcu- 
lations of the waxing and waning of the American Federation of 
Labor; who is not gulled by the latest fad in employee representation, 
profit-sharing, or other mere mechanisms and devices; who has a 
vision reaching beyond the ephemeral happenings of today to solid, 
long-run achievements. But these things will not take place until 
miscellaneous labor practices have yielded to definite labor policies. 

3. Administration of personnel must be in terms of the whole 
reach of business administration. The idea that a personnel manager 
can be fully successful when equipped with only a knowledge and 
appreciation of the worker's psychology has at present considerable 
vogue, but it will in the long run be rejected. The administration of 
personnel is of course the administration of human beings who reason, 
have prejudices, hear rumors, reflect on their circumstances, and are 
moved by their instincts and emotions. An expert knowledge of 
both individual and social psychology, and an able practitioner's 



228 BUSINESS ADMINISTRATION 

skill in both fields, would certainly be very helpful in the administra- 
tion of personnel. But while all this is true, the personnel manager 
must be much more than "a glad hand artist"; much more than one 
who "has a sympathetic understanding of the laborer's attitude"; 
much more, even, than one well versed in the technique of modern 
"welfare work." More and more it will come to be realized that the 
administration of labor means the administration of labor in produc- 
tion, and that the thoroughly competent personnel manager must be 
conversant with at least the broad principles underlying the adminis- 
tration of the other phases of the business in which he is engaged. 
This is, after all, only another way of saying that business problems 
are highly interdependent. Because of this interdependence, the 
personnel manager cannot administer his own field of activity satis- 
factorily unless he can meet on approximately equal terms the pro- 
duction manager, the sales manager, the purchasing agent, the 
advertising manager, the treasurer, the cost accountant, and other 
business functionaries in any discussion or any plan of action looking 
toward the growth and prosperity of the business as a whole. 

4. Administration of personnel must be in terms of the function- 
ing structure of all industrial society and of its evolution as well. 
This seems a large statement to make of the work of a personnel 
manager in a given business plant. It is none the less true. The 
workers of his plant come to their tasks with certain mental outlooks 
both upon the task itself and upon their position in industrial society. 
These outlooks are of course derived from their immediate social 
environment in part, and they are derived in part from the environ- 
ments of preceding periods. It would be a foolish personnel manager 
who would attempt to administer labor activities without recognizing 
this situation. What is true of the psychology of the worker is also 
true of that of the personnel manager. His attitude, and the instru- 
mentalities which he will use are the results of environment, both 
present and past. It will be conducive to sanity of judgment on his 
part if he realizes this fact. 

Social attitudes, furthermore, are reflected in institutions and 
give point to practices. It would be a strange personnel manager 
who could be indifferent to the problems of collective bargaining, 
industrial peace, social insurance or unionism. Of course, such 
matters cannot be understood except in terms of the evolution of our 
economic organization. 



THE ADMINISTRATION OF PERSONNEL 229 

Perhaps the foregoing may be reduced to a brief statement of the 
chronological steps which might wisely be taken by a person called 
upon to take charge of personnel administration of an industrial 
plant. Such a statement might well run as follows: 

1. He must first visualize his objective — that of getting men to 
work together effectively. 

2. He must formulate the conditions precedent to arriving at 
that objective, as for example, the five conditions mentioned on 
page 128. 

3. He must decide upon the technical devices, ranging from ven- 
tilation to methods of wage payment, which will assist in bringing 
these conditions into being. 

4. He must (a) formulate and (b) set up his organizations, doing 
so, not merely in terms of his own work, but also in terms of the 
work of the other lieutenants of the business. 

5. He must administer his organization with vision, with under- 
standing of the character of his contribution to the great social task 
of getting men to work together effectively. 

PROBLEMS 

t. Even in the larger industries which have now decided that .employment 
requires the special direction of an employment department, its develop- 
ment is of recent growth. Why ? 

2. "Industry does not affect wage-earners merely as persons possessing 
labor which they dispose of on a basis of time, skill, and energy. For 
most men and women, the conditions which surround Industry, and 
the output of Industry, represent all that is possible for them in the 
way of health, happiness, and life itself. Both as consumers and pro- 
ducers they are affected by all that affects production." Has this 
always been true ? If so, why is it particularly emphasized now ? 

3. "In the first place, an employment office alone can deal with the task 
of scientifically organizing the source of supply of help." Why? 
What methods and devices could it use in accomplishing this task ? 

4. "Employment is essentially a plant and not a departmental problem." 
Is this always true ? Why, or why not ? 

5. "Unquestionably the foreman must be relieved of the duty of hiring 
and firing men if the human factor of industry is to receive due atten- 
tion." Why? 

6. "In some instances employment managers report that they send men 
to the foremen for the final judgment as to their fitness." Is this 
desirable ? 



230 BUSINESS ADMINISTRATION 

7. "Every employee is given to understand that he may come freely to 
the employment department and state his grievances, if he has any, 
and that every case of inefficiency, discontent, disharmony, and mis- 
understanding will be decided only upon the evidence and always with 
a desire to be just." "It is likely to be demoralizing to the discipline 
of the factory to remove the power of immediate and summary discharge 
from the department heads." With which quotation do you agree? 

8. The personnel manager should have before him as an employment aid 
a complete organization chart of the business he would serve supple- 
mented by data concerning each division of the work." Why? What 
Supplementary data are desirable? List the uses which might be 
made of such a chart by the personnel manager. 

9. "Where, moreover, enough people are employed to make employment 
a real problem, it is a problem as important as operating itself, and 
requiring as much, if not more, ability." Do you agree? 

10. "In the first place when a man is made an employment manager for 
a corporation he should have a distinct understanding with his superior 
officers as to just what his responsibilities are to be and just how far 
he is expected to be held responsible for the character of the people he 
employs." Is this any more important in his case than in that of any 
other manager ? Why or why not ? 

11. "Complete power to determine the rates of pay is not often granted, 
but the employment manager is frequently given the right to determine 
beginning wage aud rate of increase." Should complete power be 
granted ? Why or why not ? Who should have this power ? 

12. "Before it is possible to estimate what wages can be paid it is neces- 
sary to know costs in every department of a business and in detail." 
What does this imply concerning the position and qualifications of ths 
man who is to determine the wages ? Do you agree with the quotation ? 

13. It is generally said that class consciousness has developed quite slowly 
in the United States. Can you give any reasons why this would be 
true ? If true, is it of interest to the personnel manager ? 

14. It is well for the director of industrial relations to have an intimate 
knowledge of the manufacturing processes of his plant and of the sys- 
tem of control used in those processes. Why is this important ? 

15. It is important for the director of industrial relations to know the 
sequence of operations in his plant; to be able to judge how efficiently 
the manufacturing processes are being conducted. Why ? 

16. The director of industrial relations will be wise if he keeps in close 
touch with the sales organization and is thoroughly conversant with 
its problems. Why ? 

17. The director of industrial relations should have a thorough knowledge 
of accounting as an instrument of control. Why ? 



THE ADMINISTRATION OF PERSONNEL 231 

18. The director of industrial relations ought to have a good appreciation 
of the general principles of business finance and ought to be conversant 
with the financial policy of his particular firm. Why ? 

19. It is highly important that the director of industrial relations should 
be well grounded in the general principles of business law. Why ? 

20. Other things being equal, the director of industrial relations who has a 
good knowledge of organization policies and methods is the one who is 
likely to succeed. Why ? 

21. Which is the better organization for a large manufacturing and selling 
business: (a) a vice-president in charge of all personnel, or (b) several 
personnel managers, one operating under the works manager, another 
under the sales manager, and another under the office manager ? 

34. THE CASE FOR A CENTRALIZED PERSONNEL 

DEPARTMENT 1 

The failure of managements to perceive the conflict between 
their methods of handling men and their self-interest was due to 
their failure to give careful attention to the subject of labor admin- 
istration, which in turn was due to the concentration of responsibility 
for formulating and executing labor policies in executives who also 
were in charge of manufacturing operations and responsible for out- 
put and costs. The remedy, therefore, would appear to be the 
addition of a general officer of high rank whose sole responsibility is 
the formulation and the supervision of the execution of the labor 
policies of the enterprise. The principal reasons for the addition of 
such a specialist are: 

1. Adequate attention is not likely to be given to problems of 
labor management when their administration is in charge of the 
factory manager or production manager because the • problems of 
labor administration cannot ordinarily compete with the problems 
of production for the attention and interest of the executive. In 
the first place, it is a peculiarity of the problems of production that 
they are problems of immediate importance which cannot be post- 
poned. Production schedules must be arranged and maintained. 
Unforeseen impediments, delays, and problems constantly develop 
which require immediate attention. The problems of handling men, 
on the other hand, do not press for such immediate consideration. 
They can be postponed or neglected without usually producing serious 

1 Adapted by permission from S. H. Slichter, "The Management of Labor," 
Journal of Political Economy, XXVII (1919), 816-32. 



232 BUSINESS ADMINISTRATION 

results — immediately. In the second place, defective production 
arrangements cannot escape notice. They advertise themselves most 
effectively by a falling-off in output, failure to maintain schedules, and 
a rise in costs. Defects in the administration of labor, however, have 
no such effective means of advertising themselves, for as a rule they 
produce no immediate, sharp, clearly defined effects. Unless some- 
one is carefully scrutinizing methods of labor administration, impor- 
tant defects may exist indefinitely without their presence being 
suspected. Finally, executives prefer to concentrate their attention 
upon the improvement of manufacturing processes because such 
improvements produce more direct, immediate, certain, and definitely 
recognizable increases in output or reduction in costs for which the 
executives receive credit. Improvements in methods of handling 
men produce no such direct, certain, immediate, and easily dis- 
tinguishable effects. 

2. The preoccupation in the problems of manufacturing proc- 
esses, technology, and production schedules to the exclusion of 
adequate attention to labor administration, which occurs when responsi- 
bility for the conduct of manufacturing and of labor administration 
is concentrated in the same official, severely hampers the manage- 
ment in obtaining the good will and loyalty of the workers. 

3. A specialist labor administrator is desirable to give stronger 
representation to the long-run point of view in handling labor. The 
factory manager and the divisional and departmental heads who are 
responsible for maintaining production schedules each day and for 
costs from week to week or month to month are interested primarily 
in more efficiency immediately, rather than a year or two hence. 
They are therefore under a strong temptation to sacrifice efficiency in 
the long run for immediate efficiency. 

The labor administrator is better able to see the long-run connec- 
tion between the methods of handling labor and the efficiency of the 
force than is the executive who is struggling each day to get out the 
production scheduled for that day or to beat his last week's or last 
month's cost record. More especially is the labor administrator able 
to do this since these short-sighted policies all hamper him in the 
maintenance of cordial industrial relations. By representing the 
long-run as opposed to the short-run point of view the labor admin- 
istrator tends to be a protector of a valuable capital asset — the good 
will of the workers — against tendencies to dissipate it for immediate 
but temporary benefits. 



THE ADMINISTRATION OF PERSONNEL 233 

4. Specialization of the management of labor is needed to obtain 
in the formulation of policies more adequate representation of the 
interest of the enterprise in good industrial relations. 

The interest of an enterprise is not a simple thing. It is a com- 
plex thing, a balance and compromise of particular and partially 
conflicting interests. The judgment of each executive in regard to 
the interests of an enterprise is affected by the particular interest of 
the enterprise which it is his function to promote. Sales manager, 
purchasing agent, auditor, advertising manager, comptroller, factory 
manager, production manager, chief engineer, each tends to have 
a more or less exaggerated idea of the importance of the par- 
ticular interests of the enterprise which are intrusted to him. The 
creation of a specialist labor administrator imposes a wholesome check 
upon the undue sacrifice of the interest of the enterprise in good in- 
dustrial relations to its interest in lower costs and more output. The 
labor administrator is, of course, as likely to overestimate the impor- 
tance of good relations with labor as the factory manager and the pro- 
duction manager are to overestimate the importance of output and 
costs. He will be counteracted in his extremity by the counsel of the 
factory and production managers, just as he counteracts the extremi- 
ties of the factory and the production managers. 

5. The maintenance of high standards of practice in handling 
men requires that the practices of foremen and other minor execu- 
tives in handling men be under the scrutiny of a high executive who 
gives these matters his careful attention. 

This is simply a specific application of a well-accepted principle of 
management. By no miracle will high standards of practice in labor 
administration create themselves. They will be created only by 
being taught and their observance insisted upon. The. minor execu- 
tives who handle labor, the employment manager, safety engineer, 
plant physician, welfare manager, head of the instruction depart- 
ment, foremen and gang bosses, will be assiduous, zealous, and pains- 
taking in their work in the degree that they are inspired and 
stimulated to observe high standards and held strictly accountable for 
the methods they use and the results they produce. 

6. Specialization of the administration of labor is needed to 
enable the management of labor to be conducted with a keen realiza- 
tion of the workmen's point of view and an accurate understanding 
of their psychology. Not only are non-specialist executives, with 
their minds concentrated on manufacturing processes, output, and 



234 BUSINESS ADMINISTRATION 

costs rather than on the men, and coming into close contact with the 
men but little, woefully ignorant of the minds of the men, their 
psychology, and their point of view, and also often little interested 
in informing themselves of these matters, but the nature of their 
work builds up in their minds a point of view so different from and 
even opposed to that of the workmen that even when they seek to 
understand the point of view of their men they are frequently unable 
to do so. 

7. Specialization of the management of labor is needed to reduce 
the prejudices on the part of the management in dealing with ques- 
tions of labor policy. Employers have been severely handicapped in 
handling labor by fixed ideas which have blinded them to their 
interests and caused them to take stands which gained them nothing 
but the ill will of their men. Numerous examples of such prejudices 
can be cited. The philosophy of the drive policy, that the only way 
to get much out of labor was to "treat it rough," is an example. 
A corollary of this, that attempts to obtain the good will and co- 
operation of labor by liberal treatment are futile, since labor will 
simply take advantage of liberal treatment rather than respond to 
it, is another example. The well-nigh universal rule that in a dispute 
between a workman and foreman the foreman must be upheld, right 
or wrong, in order to maintain discipline has caused much friction 
and discontent. 

Specialization of the management of labor is of course no guar- 
anty that the administration of labor will be controlled by carefully 
determined self-interest, but the specialist administrator is less likely 
than a non-specialist to be guided by traditional attitudes. Non- 
specialists lacking time and inclination to investigate problems of 
labor policy naturally fall back on traditional points of view. The 
specialist has both the time and the interest to investigate, and being 
charged with the specific function of maintaining high standards of 
labor administration, feels a peculiar sense of responsibility for the 
methods he uses and the policies he pursues. Study of the problems 
of labor administration constantly reveals to him their complexity 
and the danger of being guided by dogmatic conclusions. 

8. Success in getting problems solved depends largely upon the 
energy and persistence with which they are attacked. Solutions of 
extremely difficult problems are obtained as a rule only by someone's 
demanding that a solution be found in spite of the apparent impossi- 
bility, insisting in the face of seemingly insurmountable obstacles 



THE ADMINISTRATION OF PERSONNEL 235 

that there must be a way of overcoming the difficulties, and causing 
the problem to be studied until a solution is found. There can be no 
reliance that the exceptionally difficult problems of labor adminis- 
tration will be attacked in this manner as long as the executive 
responsible for labor administration is a non-specialist whose interest 
in labor administration is quite secondary. The preoccupation of 
the non-specialist with other problems causes him readily to accept 
the exceptionally difficult problems of labor administration as unsolv- 
able, instead of insisting more emphatically than ever that they 
must be solved. 

9. Efficient administration of labor requires possession of special- 
ized knowledge and command of a specialized technique. The 
handling of men is not, as is sometimes supposed, simply a matter of 
personality and of ability to understand human nature. Many 
problems in labor administration require, not merely sound intuition 
or instinct in dealing with men, but ability to solve problems of a 
more or less technical nature. This renders desirable a knowledge of 
practices and policies which have been successful in solving the same 
problems elsewhere. The fund of experience on the various phases of 
labor administration is so large and growing so rapidly that only a 
specialist can hope to be familiar with it. 

The subordinate specialists in charge of specific phases of labor 
administration cannot all be expected to be of strictly first-class 
executive ability. Though suitable for executing policies, they may 
not be suitable for determining fundamental labor policies. They are 
likely to lack the requisite shrewdness of judgment and boldness and 
originality of imagination, to be too timid in their conceptions of 
what the labor administration can hope to accomplish and therefore 
of what it should endeavor to accomplish, and to be dominated by 
tradition and prejudices. In the field of labor administration par- 
ticularly, where traditional prejudices are strong and firmly estab- 
lished, is someone with bold and original imagination and willingness 
to break with the past needed to formulate policies. 

10. Although the essential thing in winning the confidence and 
co-operation of a force is a liberal labor policy, the personality and 
character of the executive who handles labor is an important factor. 
The handling of grievances, one of the most important and most 
delicate tasks of the labor administrator, illustrates the need in the 
labor administrator for highly specialized qualities of personality. 
Among these are insight into other men's points of view, ability to 



236 BUSINESS ADMINISTRATION 

put one's self in another's place, even in an opponent's place, ability 
to win the confidence of other men, particularly the complainant, 
who is likely to regard all representatives of the management as 
prejudiced against him and hostile to him and as intending to deceive 
him rather than to give him fair treatment, ability to draw frank 
statements from timid or hostile witnesses, and, most difficult of all, 
ability to convey to the complainant the point of view of the manage- 
ment, to make him see the management's side, and to convince a 
complainant who is in the wrong that he is wrong and that his com- 
plaint is not being arbitrarily decided when it is decided against him. 

11. Specialization of labor administration is needed to bring into 
the highest councils of the management more thorough knowledge 
of and stronger interest in the more fundamental though less immedi- 
ately practical aspects of the labor problem. The typical manager of 
a non-union enterprise is inadequately informed in regard to the 
labor movement, its practices, policies, ambitions, philosophies, 
strength, prospects, tendencies of change within it, and the reasons 
lying behind these specific phases of the movement. He is hampered 
in obtaining information by publications of employers' and manu- 
facturers' associations and speeches of their officers and attorneys, 
which too often foster intolerance and prejudice rather than spread 
information. 

12. Specialization of management of labor means in time the 
creation of a body of professional labor administrators. This means 
the creation of a professional spirit, professional ideals, and profes- 
sional standards of conduct. This professional spirit and these 
professional standards may be expected to exert a liberalizing influ- 
ence upon the standards of labor administration. 



See also p. 118. Organization of the Personnel Department, 
p. 124. Functions of the Personnel Department, 
p. 126. Another Statement of Functions. 



35. THE PLACE OF THE PERSONNEL DEPARTMENT IN 
THE BUSINESS ORGANIZATION 1 

It is the purpose of this reading to consider how policy is best 
adopted, transmitted, and put into effect. Especially are we con- 

1 Adapted by permission from Ordway Tead and H. C. Metcalf, Personnel 
Administration, pp. 374-92. (McGraw-Hill Book Company, Inc. 1920.) 



THE ADMINISTRATION OF PERSONNEL 



237 



cerned to see how personnel policy or the policies of other depart- 
ments where they are affected with a human interest, are "put 
across." The problem is to find effective ways of interdepartmental 
co-ordination; to see how the ideas of staff experts can be made to 
function in the line departments; to see how the several staff experts 
can work in harmony and not at cross purposes — can work with 
prior understanding of a common aim. 

FUNCTIONAL CHART SHOWING CO-ORDINATION OF PERSONNEL 
AND PRODUCTION ADMINISTRATION 




1 j \ 1 1 1 . 

L fr-j MAna/jsa Cmmittr^- -\ \Vxjt Raft CarmiH-e?\ 



The principle underlying sound co-ordination. — Every special 
interest directly affected by decisions concerning the operation of any 
enterprise or function should be a party to the making of those decisions. 
The principle is immensely relevant to this discussion because it 
seems to us fundamentally true that any policy which is adopted is 
more likely to be a reasonable and wise one if those whom it affects 
help to shape it; that the transmission of policy to the affected 
parties takes place most naturally when those parties or their dele- 
gates are present when the policy is adopted, know its implica- 
tions and the reasons for its adoption, and hence can interpret it to 
their fellows; that the policy when so adopted, so transmitted and 



238 BUSINESS ADMINISTRATION 

interpreted, has a better chance of intelligent, willing and thorough 
execution, than if it is handed down as a fiat from the management. 

The determination of general policy. — We shall assume that 
the president of the corporation is at the same time a member ex- 
ofhcio of the board of directors and the executive of the factory 
organization. Immediately associated with him there will be four 
major, staff executives — the personnel manager, production manager, 
sales manager and financial executive. For the determination of 
general operating policy, this group of five would constitute the 
nucleus to which others would be added, of an Operating Committee. 

This operating committee would meet at least weekly; indeed in 
some plants it has a daily morning conference. And its membership, 
if it conforms to our suggestions, will be as follows: 

The Chief Executive, the Production Manager, the Personnel 
Manager, the Sales Manager, the Treasurer, the Foremen's Repre- 
sentative, the Workers' Representatives. 

The personnel committee. — If it is understood that beyond the 
determination of broad policies the work of the operating committee 
does not go, there is need for a body in each of the staff branches of 
management which will decide how their policy shall be carried out 
and will acquaint the affected groups with proposed new methods. 

Policies which relate to personnel should, we propose, go for de- 
cision about methods of execution and delegation of duties to a 
Personnel Committee. The personnel committee is primarily advis- 
ory to the personnel manager. The executive responsibility lies 
clearly with this functionary. 

The composition of such a personnel committee might well be 
as follows: 

The Personnel Manager (chairman), the Production Manager, the 
Assistant Personnel Manager, the Foreman's Representative, the 
Workers' Representatives. 

Board of personnel directors. — Within each staff department lies 
a further field for common understanding and agreement upon 
policy and procedure; and in the personnel department the need for 
a united stand and a human point of view are obvious. For this 
reason, it has been found useful in most personnel departments 
comprising more than two or three workers to have a definite organi- 
zation within the department. This assures regular conference 
between the personnel chief and his executives on employment, 
health, safety, training, research, service and joint relations, and 
secures the benefit of the interchange of technical ideas and of the 



THE ADMINISTRATION OF PERSONNEL 230 

wholesome expert criticism of department colleagues. We shall refer 
to this group as the Board of Personnel Directors. 

Determination of production policies. — Because production policies 
so often affect the working force directly, there are sound reasons 
for organizing their adoption and transmission in a manner similar 
to that just considered in relation to the personnel department. 
This would mean the creation of a committee, called perhaps the 
Production Committee, composed as follows: 

The Production Manager (chairman), the Personnel Manager, 
the Assistant Production Manager, the Foremen's Representative, 
the Workers' Representatives. And where special problems were up, 
such other executives as the head of the planning department, the 
chief engineer, thechief chemist, etc., would be called in. 

It is the function of this committee to advise with the production 
manager about methods of putting new production policies into effect 
— the executive power remaining, of course, with the production head. 

Determination of sales policy. — In the form of plant organization 
which this chapter assumes, general sales policies would be decided 
in the operating committee. How drastic a proposal this is, may not 
be at first appreciated; for many firms are still unconscious of the 
extent to which they allow the sales organization to dictate to the 
rest of the management. If the salesman can get the orders, it has 
formerly been true that the shop will be turned on end if necessary 
to fill them; if he cannot get them, the rest of the organization sits 
by paralyzed. 

The point of view about the selling policy which is increasingly 
recognized as sound is at almost the other extreme from this. The 
sales force is being called upon to sell what the production force can 
make. And this certainly comes nearer to a sensible relationship of 
sales to production than the arrangement now so frequently met. 

It is probably true, at least for the present, that all the person- 
nel manager can do to oppose a sales policy which spells irregular 
work, rush orders, overtime work, small-lot orders, etc., is to use his 
influence and knowledge in the operating committee. But this will 
be a valuable educational service and he will soon find support for 
his advocacy of regularized production from the production manager, 
foremen, and workers. For it will soon be obvious to these groups 
that on all such matters as changes in styles and specifications, 
decisions about amounts of finished goods to be kept on hand, quality 
and amount of goods that can be delivered on certain dates, these 
groups should be consulted. The adoption of improved sales 



240 BUSINESS ADMINISTRATION 

methods will then devolve upon the selling staff; and they will find, 
as our next chapter indicates, an appreciable body of suggestive 
experience already at hand to help in devising a sales policy which 
regularizes orders and demand. 

Determination of financial policies. — Obviously policies which 
affect the balance sheet are likely to work back and influence the 
pay-roll — and perhaps other elements in the personnel procedure. 

Companies should realize how intimately connected with per- 
sonnel matters their financial problems are. And even beyond that, 
managements should now consider the benefits in increased knowl- 
edge, confidence and sense of security, which a consideration of 
financial policy with employees is tending to bring. 

Each day the newspapers carry financial stories and advertise- 
ments of the profit-making ability of this or that stock. The workers, 
or the workers' representatives, see these stories. And having no 
other knowledge on which to base any more exact opinion, they 
necessarily take them at their face value, draw their own conclusions 
and act accordingly. Illustrations are plentifully at hand to show 
that where managements have taken workers fully, freely and sin- 
cerely into their confidence on financial matters the results have 
been mutually satisfactory. 

Charts of co-ordination. — Organization charts can serve a useful 
purpose in keeping everyone's thinking straight about the correla- 
tion of functions. But confusion will be avoided if it is recognized 
that charts are of three distinct types to convey three different kinds 
of information. And until all three are understood, the whole story 
of the distribution of executive work and authority is not apparent. 

There is, first, the authority chart, which shows the line of author- 
ity, of policy determination and execution. 

There is, second, the chart of functions, which shows what func- 
tions each department is supposed to perform. 

And, third, there is the personnel chart, which shows how the 
several functions are distributed among the executives. Usually, 
the first chart can be combined with the third to show the line of 
authority in terms of those who exercise it. 

To help make graphic the proposals of this chapter, we have 
included in a chart our general conception of the interrelation of the 
different functional groups of the personnel and production depart- 
ments. To keep the chart as simple as possible we have not shown 
how these two departments might be co-ordinated with sales and 
finance; nor have we included any relationship to outside bodies. such 
as would be entailed if a collective bargain existed with a labor union. 



THE ADMINISTRATION OF PERSONNEL 



241 



36. ORGANIZATION CHART OF PERSONNEL WORK IN 
ONE INDUSTRIAL PLANT 



President 
General Manager 



Vice-President 
Factory Manager 



I Utility 



I Secretary 



Women's Work 



I Secretary 




Manager Labor Dept. 



Assistant Manager 



Special Duties 
Employers' Association 
Approval Piece Prices 

Labor Troubles 
Anticipation 
Prevention 
Adjustment 

Consulting 
Labor Departments of 
Subsidiary Companies 



LABOR DEPARTMENT COUNCIL 



Div. 1 — Service 



h I 



Legal Advice 



Labor 
Legislation 



Recreation 

r 



> 



Social and Ath- 
letic Activities 
Military Drill 
Athletic Field 
Club House 



Lunch Rooms 



Plant No. 1 
Plant No. 2 



Housing and 
Thrift 



Houses 
Apartments 
Rooms 
Thrift 
Hard Luck 
Investment 
Co-op. Selling 
Campaigns 



Alien Division 



y 



Div. 2 — Plant 2 



Labor Bureau 
Women's Work 
Lockers 
Mail 



Police 



Div 3 — Employ- 
ment 




Factory 

Employment 



Hiring 
General 

Information 
Lockers 
Master Keys 
Correspondence 



H [ 



Labor Bureau 



Offices 
Watchman 
Lobby 
Special 

Investigation 
Clock Towers. 
Protection 



Grievances 

Transfers 

Discharges 

Turnover 

Identification 



Records 



Employment 
Insurance 
Service Pin 



— — I Library 




Factory 

Office 

Employment 



I Liberty Loan I— 



Div 4 — Safety and 
Health 



Hospitals 



> 



Surgical Attention 
Medical Advice 
Physical Exams. 
Industrial 

Rehabilitation 



Safety First 



Accident 

Prevention 
Compensation 
Safety Insp. 
Plant Appearance 
Approval 
Sundry Work 



Bunk Houses 



V 



-. JDiv. 5 — Education 



Flying Squadron 

General 

Alien 

Apprentices 
Factory Course 
Inspectors 



242 BUSINESS ADMINISTRATION 

REFERENCES FOR FURTHER STUDY 

Jones, The Administration of Industrial Enterprises, chaps, x-xv. 

Shaw, An Approach to Business Problems, chaps, vi, xii. 

Tead and Metcalf, Personnel Administration. 

Kelly, Hiring the Worker. 

Allen, The Instructor, the Man and the Job. 

Webb, The Works Manager Today. 

Marshall, Readings in Industrial Society, chap. ix. 



CHAPTER IV 

THE ADMINISTRATION OF MARKET PROBLEMS 

Purposes of this chapter: 

i. To see the work of marketing functionaries as one phase of the 
modern co-operation of specialists. 

2. To secure an elementary knowledge of present-day market 
functions and market structures. 

3. To get some appreciation of the administrative problems and 
control devices in purchasing and in selling. 



A. The Knitting Together of Modern Specialists 1 

Let us begin by getting a view of the part played by the purchasing 
agent and the sales manager in our modern economic society. Briefly 
stated, their function is that of aiding in knitting together our modern 
specialists. Let us see what this means. 

"Specialization is fundamental in economic organization, because 
it is the means by which man increases the return to a given amount 
of work," says the English economist Clay. This is the nub of the 
whole matter. Man in his active adaptation struggle is always 
eager for devices which will increase productivity, and probably none 
has been more fruitful than specialization. We know already the 
prime reasons why it increases productivity. They are well stated 
by Clay: "It brings about this result in two ways, by subdivision of 
tasks and by repetition of tasks. Subdivision results in operations 
easier in themselves, repetition enables operations to be performed 
with greater ease." We know also from our historical study that 
there must be a market wide enough to absorb the increased produc- 
tivity before it is worth while to specialize. 

1. Ours is a society of specialists. — Historically speaking, one of 
the earliest forms or manifestations of specialization was the differen- 
tiation of occupations. Even in the mediaeval manor, where nearly 
everyone engaged at one time o^ another in practically all of the 
manorial tasks, there was some specialization of this kind. There 
was pretty certain to be a priest and a miller, and quite likely a 

1 Adapted by permission from L. C. Marshall and L. S. Lyon, Our Economic 
Organization (The Macmillan Company, 192 1.) 

243 



244 



BUSINESS ADMINISTRATION 



blacksmith or a carpenter. With the rise of towns there developed 
clothmakers, barbers, millers, innkeepers, merchants, shipwrights, 
pinmakers, tanners, and coopers, to mention only a few of them. 

Occupations grow or wane, rise or disappear, in keeping with 
men's wants and with changing economic organization. As time 
went on, occupations became more and more numerous, more and 
more specialized. With the coming in of the factory system some 
of them rose to the position of great industries. For example, the 
mediaeval shoemaker has been almost supplanted by the modern 
shoe-manufacturing industry; the mediaeval cooper by the great 
cooperage plants. Today we see our social resources, land, labor, 
capital, and acquired knowledge, divided up or apportioned among 
great industries, which are so numerous that a mere list of them 
would cover pages. It would be tiresome to enumerate them. In- 
stead, let us look at the diagrammatic classification of the specialized 
productive enterprises of a modern community, as set forth in the 
early pages of this book (see p. 2). It could be subdivided much 
further, but as it stands it is very useful in giving us a bird's-eye view 
of the specialized enterprises of today. 

The story of the differentiation or specialization which has 
occurred since the days of the manor can be told in another way, 
this time emphasizing, not our groupings into lines of industry, but 
the differentiation of the tasks of the worker. Put in the form of a 
diagram it would run this way: 



UNSPECIALIZED 
LABOR 



divides 
into 



TRADES 



which 




divide 


PROCESSES 


into 





which 

divide 

into 



DETAILED 
OPERATIONS 



Let us begin again with the unspecialized inhabitant of the 
manor — unspecialized, that is, except for the priest, the miller, the 
blacksmith, and the carpenter. The next stage is the differentiation 
into trades or crafts, some of which have been mentioned above. 
In some cases the market is not wide enough and the demand for 
the product not great enough to justify any further differentiation; 
for example, we have even today in rural districts the all-around 
carpenter; in the country town or the suburb we have the physician 
with a general practice, or the lawyer who handles all kinds of cases. 

In other cases, however, a wide market existed and trades became 
differentiated into processes. We know how the expanding market 



THE ADMINISTRATION OF MARKET PROBLEMS 245 

led under the domestic system to the differentiation of the old cloth- 
maker into the spinner, the weaver, the dyer, the fuller,, the shearer, 
and others. The smith became differentiated into the goldsmith, 
the silversmith, and the blacksmith. Abundant examples of the 
same process exist in our society today. In our larger cities general 
medical practice has frequently been broken up into the work of the 
eye specialist, the ear specialist, the heart specialist, and others. 
The lawyer has become the corporation lawyer, the patent lawyer, 
and the claims attorney; the all-round machinist has differentiated 
into quite a range of " specialists." 

The case of the machinist is on the very border of the fourth 
stage of development, when processes become split up into their 
small constituent operations. This stage is not often reached in the 
realm of professional services, but it is the typical state of affairs in 
machine industry under the factory system. In the large plants of 
the meat-packing industries, for instance, where more than 1,000 
cattle a day are killed, each of several hundred butchers, helpers, and 
laborers performs some one specialized detailed operation in the 
course of turning the live animal into dressed meat. 

The differentiation into enterprises and the differentiation of 
trades, processes, and operations have been discussed separately, but 
they are not separated in our actual want-gratifying activities. Some 
idea of how they are interwoven and intertangled in ordinary business 
life may be secured if you will think back over the preliminary steps 
involved in your making such a simple thing as a wooden footstool 
in a manual-training class. Take, first of all, the wood which you 
work up. Let us go no further back than the cutting down of a 
tree in a forest. This is done by one specialist. Later the tree is 
sawed into rough boards at a sawmill by another group of specialists. 
It is then bought by a wholesale lumber dealer; transported by 
another group of specialists; sold to a retail dealer who has a mill for 
planing it and working it up into more appropriate shapes; sold by 
the retail dealer to your school; transported through the streets by 
a draying concern. The material has thus passed successively through 
the hands of a range or series of specialists who can be classified from 
one point of view in terms of the producing industries of society, 
such as lumbering, transporting, and merchandising, and can be 
classified from another point of view in terms of trades or processes 
(such as teamster, brakeman, telegrapher), all of whom were engaged 



246 BUSINESS ADMINISTRATION 

in preparing wood for your use. A similar series, of course, exists 
for each tool you use, for nails, glue, or other material. 

But this is only the beginning. Every one of the specialists in 
your original series or succession reaches back into one or more other 
series. Take, for example, the sawmill which sawed out your board. 
It is the end or culmination of the work of several series of specialists 
reaching back into the forest, the ore mine, and the cattle industry. 
It might well happen that the specialist in the ore mine or in the 
cattle industry who took part in the series culminating in the saw- 
mill also took part in the series culminating in your hammer, or the 
leather you used in upholstering the stool. This illustration is typical. 
It shows how our specialization runs in great ranges or series which 
criss-cross one another in bewildering complexity. We must try to 
find out how order can exist in such a seeming chaos; how it can be 
that a hammer is at hand when you need it; that nails are procurable 
when you need them; that every specialist in every series is, speaking 
generally, able to proceed in his work without interruption or delay. 

In these ranges or series we find certain specialists who are called 
functional middlemen. What this means can be better seen if we 
use historical perspective. 

When we think of the mediaeval merchant who sold either in 
England or abroad, there comes to our minds an unspecialized 
merchant who fared forth with his pack, his boatload, or his shipload 
of goods, seeking the people to whom he could sell at a profit. He 
performed a wide range of tasks. He displayed and advertised the 
goods to the buyers, he furnished the funds for financing his business, 
he collected the payments, he acted as policeman or soldier to protect 
himself and his goods, he bore the risks of fire, theft, accident, and 
loss. The variety of his functions was certainly great. 

As new markets were opened up, both at home and abroad, and 
the volume of English trade grew, enterprising men began to see that 
a profit could be made by carrying on certain lines of business which 
would be an aid to the merchants by relieving them, of course for 
a payment, of some of their many tasks. These enterprising men 
specialized in certain functions. The specialization of function 
which began then has continued down to our own times. The man- 
ner in which the functions performed in trade by the mediaeval 
merchant have split up among a group of specialists can be shown 
by a diagram. 



THE ADMINISTRATION OF MARKET PROBLEMS 



247 



The mediaeval 
merchant had 
to perform the 
functions of 



Transporting 
Protecting 
Insuring 
Storing 

Advertising 

Selling 

Gathering 

information 
.Financing, etc. . 



These functions 
are now per- 

► formed by- 
specialized 
middlemen 



Railroads, ship lines, 

etc. 
The state police, Army, 

Navy, etc. 
Insurance companies, 

etc. 
Warehousemen 

Advertising agencies, 
newspapers, and 
other media 

Special salesmen 

Trade papers, govern- 
ment agencies, etc. 

Financial institutions, 
etc. 



We specialize, not only by industries, by processes and operations, 
and in series; we specialize also by localities. As everyone knows, 
in the United States oranges, lemons, and other citrus fruits are 
grown mainly in Florida and California. Minnesota specializes in 
wheat. Iowa and Illinois specialize in corn-raising. Cotton is raised 
on the fertile land and in the warm climate of the South. Northern 
Michigan and northern Minnesota have localities which specialize in 
the production of copper ore. The states of the West and Southwest 
are specialists in producing livestock. Cotton manufacturing is 
almost confined to three districts, New England, the Middle States, 
and the South. 

Since the modern consumer, himself a specialist, actually does 
succeed in gratifying wants and since the modern producing specialists 
actually are able to carry on their productive activities, it is clear 
that the specialists of modern society, whether they be individuals, 
trades, business units, or localities, are correlated into a working 
system; that they co-operate with one another in production and in 
want-gratification. 

2. Modem specialists are knitted together "by authority" and 
"through exchange" — For purposes of this study there are two main 
kinds of co-operation: co-operation by authority, and co-operation 
through exchange, both of which play important parts in our economic 
organization. The members of a football team have their specialized 



248 BUSINESS ADMINISTRATION 

tasks which they perform, when practicing, under the authoritative 
direction of the coach. During their games, they are under the 
authority of their captain. A communistic society, where a central 
committee apportioned us to various tasks and directed the gratifica- 
tion of our wants, would be another illustration of the co-operation 
of specialists by authority. We must not suppose that such an 
illustration is purely hypothetical. In our own country there have 
been dozens of communistic colonies or societies, such as the Shakers, 
the Oneida Community, the Harmonists, the Amana Society, Brook 
Farm, and Icaria, which have been operated on this basis. Some 
have been short-lived, others long-lived; many have been abandoned, 
some are still in existence. 

One thing is noticeable in all cases of co-operation by authority. 
It is likely to be a quite definite process, with everyone aware of the 
scheme of organization. Co-operation through exchange, on the other 
hand, is not likely to seem so highly organized ; the parties concerned 
are not always fully aware of what is going on. In our discussion 
of the localization of industries we saw a case of co-operation through 
exchange. It was very effective co-operation which was sometimes 
world-wide in scope, but probably very few of the specialists con- 
cerned realized that they were co-operating. They probably thought, 
if they concerned themselves about it at all, that they were simply 
selling their goods. 

So they were; but though they were simply selling goods in the 
market, these goods moved to points of need (some consumer or some 
producing unit) as truly as if the process had been ordered by some- 
one in authority. Those participating in the market transactions 
were as truly agencies of co-operation as was the central committee 
of our hypothetical communistic society. The essence of the whole 
matter is this: Specialists can produce more than non-specialists; 
through exchange or by authority (and it is mainly through exchange 
in our society) the enlarged product becomes available for all. It is 
mainly exchange which bridges the gap created by specialization 
between producer and consumer- between trade and trade; between 
firm and firm. Its goal is the making of the product of each avail- 
able for all. 

The co-operation — the correlation of specialists — which occurs 
within a business unit may fairly be described as co-operation by 
authority. We have seen that the central figure in this process is 
the business manager. We have also seen that he and his sub- 



THE ADMINISTRATION OF MARKET PROBLEMS 249 

ordinates are responsible for the relations of that unit with the rest 
of the world, but it has perhaps not been made entirely clear through 
what channels its co-operation with the rest of the world is carried 
on. In the main, it is through channels of exchange. The rest of 
the world furnishes (sells) it the materials and equipment for produc- 
tion. It furnishes to the world (sells) its product — shoes, let us say. 

It is quite clear that the specialization of men and processes 
which we have been studying is a complete antithesis of self-sufficiency 
in want gratification. It can occur only in a group or society; only 
when specialists can be "organized" so that the results of the special- 
ized efforts of each can be made available for all. Our study would 
not be complete without a recognition of the part played by social 
control in this process. We have given credit, as was due them, to 
the manager of the business unit, to the middleman, and to the 
functional middleman, but we must keep in mind that all of them 
performed their tasks according to "rules of the game." Habit, 
custom, tradition, public opinion, codes of business ethics, all play 
their part. The state, not only by direct participation as in the case 
of the post-office, but also by such regulative activities as the formula- 
tion of rules of business law, the provision of a monetary system, the 
control of transportation facilities in the interests of all, the super- 
vision of conditions of labor even to the extent of fixing minimum 
wages, to mention only a few of literally hundreds of cases, furnishes 
an essential part of the business environment. 

3. The term market here used in a narrow sense. — No one should be 
misled by the predominance in the foregoing paragraphs of illustra- 
tions drawn from the marketing of ordinary goods. "The market" 
is as truly a means of the co-ordination of specialists when laborers 
are hired, land is rented, money is borrowed, corporation stock is 
issued, or hotel lodgings secured as it is when shoes are sold by the 
manufacturer. "The market" is a complex social institution, based 
in our society on the right of private property, which is used in mul- 
titudinous forms to aid in bringing about the co-operation of specialists 
through exchange. In strict logic, the manager who hires labor or 
who borrows capital, is in relationship to "the market" as truly as is 
one who sells books. // is accordingly a concession to popular usage 
of terms when, in this chapter, we limit our discussion to the buying and 
selling of ordinary goods. Such limitation contains no untruth; it 
merely fails to tell the whole truth. No harm has been done, how- 
ever, if we realize the limitation under which our discussion proceeds. 



250 BUSINESS ADMINISTRATION 

PROBLEMS 

1. What preceded specialization? Was there always specialization of 
industry into primary and secondary industries ? 

2. In what ways is specialization able to increase productivity? 

3. "In production by specialists there are two leading considerations. 
One is differentiation, the other is unification." Explain. What 
determines the limits to which differentiation may be carried ? What 
factors make for effective unification ? 

4. "Those participating in market transactions are agencies of co- 
operation." Explain. 

5. Was there co-operation in the family economy? Would there be 
co-operation in communistic society? Would co-operation in these 
cases be effected through exchange ? 

6. "Exchange does not really help. Indeed, it hinders. Time and 
energy are spent in merely passing goods on." Do you agree ? Sum- 
marize the social benefits of exchange co-operation. 

7. When people congregate at a certain place and exchange goods by 
barter, do they constitute a market ? 

8. Is the retail grocery a market? Is the wholesale grocery store a 
market? Is the place the market? Suppose the wholesale store has 
no stock on hand but consists merely of an office, and office force, and 
means of communication with producers and retailers. Is it a market ? 

9. Draw up a definition of market. 

10. Our society is often spoken of as a market society or a society of 
market structures. Show why these terms are appropriate. Would 
they have been equally appropriate if applied to English society in 
the manorial period ? 

n. What is meant by the expression "functional middlemen" ? Name as 
many different functional middlemen as you can. What functions 
originally performed by merchants are still performed by merchants 
today ? 

12. "The social function of the business manager." What do you con- 
ceive it to be ? 

13. "The social function of the sales manager, or of the purchasing agent." 
What do you conceive it to be ? 

14. Explain how an understanding of his social function enables a purchasing 
agent or a sales manager to be a more competent business man. Be 
specific. 

B. Market Forces, Marketing Functions, and Market Structures 

If we have any one basic purpose in this chapter, it is that of 
getting an appreciation of the administrative problems and control 
devices found in modern purchasing and selling. It may accordingly 



THE ADMINISTRATION OF MARKET PROBLEMS 251 

seem that we should at once pass to such topics as " Sales Manage- 
ment for a Manufacturing Business " and " The Work of the Purchasing 
Agent" instead of deferring their treatment, as we do, to pages 308 
to 362 and 362 to 384 respectively. If, however, we should pass at 
once to specific discussion of these topics it would be a case of more 
hurry and less haste. We are studying business administration , which 
includes policy formation and is not confined to control of routine 
operations. Policy formation involves business judgment, and 
business judgment can be sound only when it is formed with as much 
awareness of background considerations as of immediate issues. 

It is worth while, accordingly, to make a survey of the forces which 
have molded and are molding "the market world" in which the 
modern manager operates and which largely determine his judgments 
and largely condition his activities. It is worth while, also, to see 
marketing activities in terms of the functions which are being per- 
formed so that we may have a basis for judging the relative worth of 
various activities by measuring their contribution to some basic 
function. Finally, in the marketing field, as in other fields of human 
endeavor, ranges of structures (mail-order houses, jobbers, depart- 
ment stores, etc.) have come into being which are available for the 
use of the manager. Before he can select wisely among them, how- 
ever, he must see them not as isolated facts but as devices (frequently 
alternative devices) which have been shaped by forces to accomplish 
ends. If he views the structures merely as structures they seem to 
be a miscellaneous, overlapping, self-contradictory, confused mass. 
Viewed in terms of forces and functions, however, order comes out 
of the seeming chaos. 

In this present section on " Market Forces, Marketing Functions, 
and Market Structures" an attempt is made to give this background 
necessary for intelligent discussion of specific issues in purchasing and 
selling. There is a single selection (Selection 1) dealing with market 
forces and another selection (Selection 2) dealing with market func- 
tions. All the rest of the section is devoted to market structures. 
What are these structures? We begin by noticing (Selection 3) the 
methods of sale available and the relation of advertising to these 
methods. A hasty look is taken (Selection 4) at organized markets. 
We then pass to a study (Selections 5-13) of the outstanding structures 
which are utilized in the marketing of ordinary goods designed for 
individual consumption, the main attention being given to manu- 
factured, rather than agricultural, commodities. Selections 5, 6, 7 



252 BUSINESS ADMINISTRATION 

deal with the structures used in "wholesaling." Selections 8-13 are 
concerned with retailing and here the most space is given to " massive " 
retail trade — to the mail-order house, the department store, and the 
chain store. We omit, except for passing notice, the co-operative 
movement, both in wholesaling and in retailing. The omission is 
not intended to imply that the subject is unimportant. On the 
contrary, associative activities of business men are very important 
and their importance is growing rapidly. 

The discussion closes with a selection (Selection 14) showing that 
different structures are found useful in marketing different classes of 
commodities and with two selections (Selections 15 and 16) dealing 
with the breaking away, by marketing functionaries, from the 
orthodox system of distribution under the strain of the events con- 
nected with the second phase of the industrial revolution. 

Perhaps there should be emphasized again the fact that in this 
chapter we are using the word market in a narrow sense (see p. 249). 
In accord with this use of the word market, we use the words "market 
structures" in a correspondingly narrow sense and exclude from 
discussion such structures and institutions as are, in highly specialized 
ways, dealing with transportation, financing, risk bearing,, information 
gathering, etc. This narrowing of our attention to brokers, jobbers, 
wholesalers, retailers, etc., and this exclusion of banks, insurance 
companies, railroads, trade journals, etc., will do no harm if we can 
only keep it clearly in mind that the narrowing has taken place. 
We must remember that we are dealing with only one set of samples 
(a very important set, it is true) of our market structures. 

Perhaps, too, it should again be emphasized that the matters in 
this section are background material for the later sections on "Sales 
Management for a Manufacturing Business" and "The Work of the 
Purchasing Agent." The student should keep his mind pointed 
toward these sections. 

PROBLEMS 

1. "The presence of highly specialized capital in modern industry makes 
it difficult to transfer from one industry to another and consequently 
makes it necessary for the manufacturer to study control of his market." 
Is this true ? Is it the whole truth ? 

2. In 1800 the number of days of total formal schooling of the average 
American citizen was 82. In 1840 it was 208. In 1916 it was 1,180. 
What bearing have these facts upoi the evolution of marketing 
methods ? 



THE ADMINISTRATION OF MARKET PROBLEMS 253 

3. Cite illustrations where developing technology has influenced marketing 
methods. Is the refrigerator car a case in point ? 

4. Tabulate definite reasons why a knowledge of the economic develop- 
ment of the last two hundred years will color the thinking and shape 
the acting of a sales manager. 

5. "The trust movement, scientific management, schools of commerce, 
and imperialism are merely different phases of a single movement." 
Do you agree ? 

6. "Integration of industry and interlocking directorates have arisen in 
part out of marketing problems." Explain. Consult Selection 15. 

7. "Large-scale operations in marketing have their roots down in the finan- 
cial organization of society which has come into being." Explain. Be 
specific. Are their roots down in other soils also ? 

8. The following have been listed as advantages of large-scale produc- 
tion: (a) handling a large mass of goods; (6) purchasing over a wider 
market; (c) securing more competent and experienced buyers; 
(d) greater probability of regular demand; (e) greater ability to bear 
the risk of goods left on hand; (/) more effective advertising of goods; 
(g) more competent and experienced commercial travelers; (h) greater 
ease of securing high firm reputation; (i) greater variety of goods for 
individual taste; (J) better utilization of the principle of division of 
labor; (k) better mechanical equipment; (/) cheaper power; (m) better 
utilization of waste; (n) lower charges for transportation; (0) better 
financial arrangements; (p) better managerial ability; (q) ability to 
maintain research departments; if) the saving of cross freights. What 
ones of these apply to factory production ? What ones apply to 
marketing ? 

9. Be sure you know in considerable detail what is meant by these market- 
ing functions: (1) assembling; (2) storing; (3) assumption of risks; 
(4) financing; (5) rearrangement; (6) selling; (7) transportation; 
(8) pricing; (9) information; (10) title transferring. 

10. From what you know of early community life could there have been 
an assembling function then? What do the services of assembling 
include ? Mention some of the middlemen who assist in carrying out 
these activities. 

11. Producers have to perform the storage function to a certain extent, but 
they shift it as much as possible to middlemen. Why so ? Under 
what conditions does a producer perform the storage function himself ? 

12. What are the reasons for the growth of specialized warehouses? Has 
developing technology had anything to do with it ? 

13. "The consumer when he buys in large quantities, performs part of the 
marketing function of storage." "The tendency has been for the 
consumer to shift this function back more and more to middlemen." 
What reasons could there be for the second situation ? 



254 BUSINESS ADMINISTRATION 

14. Enumerate the kinds of merchandising risks. Who are the middlemen 
taking care of them ? Do they care for them fully ? 

15. "The brunt of the financing burden is borne by the wholesale trades." 
Why or why not ? 

16. "Selling is the most important of the marketing functions and the 
most difficult one to perform." Is this true ? What are the elements 
of selling ? 

17. You are about to engage in manufacturing commodity x. Do questions 
1 to 16 raise issues which you need to understand? 

18. Under what circumstances or in what types of cases are we likely to 
have organized markets ? 

19. Ascertain the meaning of such terms as jobber, selling agent, mill 
agent, factor, wholesaler, commission men, brokers, manufacturing 
jobbers, semi-jobbers, buying syndicates, co-operative jobbing, orthodox 
method of distribution. Why are there so many different types of 
middlemen ? Can terms be sharply differentiated in this field ? 

20. What advantages are there in selling direct to jobbers ? 

21. What economic forces have brought about the development of the 
manufacturing jobber ? What motives underlie co-operative jobbing ? 

22. "The retailer outside of the larger city department stores could not 
survive without the aid of the jobber." Explain what is meant. Of 
what importance is it to jobbers that the retailer be a good merchant ? 

23. "Buying associations have been organized by the 'regular' retailers 
of many cities and districts to meet the new condition." Whom are 
they fighting ? 

24. What advantages does the use of a branch house for distribution to 
retailers possess over the use of jobbers ? What disadvantages ? 

25. What reasons can you give for the growth of mail-order selling? 

26. "The mail-order house has used the right kind of publicity. The retail 
dealer, generally speaking, has not. This is why the catalogue house 
many times has the better of the argument. It has been repeatedly 
demonstrated that the retail store using proper advertising backed up 
by values, prices, and service, can simply walk away with the busi- 
ness, leaving the mail-order house far behind." Explain. 

27. "The modern department store differs, as day differs from night, from 
the old-time general merchandise store." Explain. 

28. If the department store divides itself into sections, each having its 
own selling and buying staffs, what economies can be effected ? 

29. What advantages has the department store compared with small retail 
one-line establishments ? What disadvantages ? 

30. What types of chain stores are there ? Why has each type developed ? 

31. What are the advantages and disadvantages of the chain store? 

32. What general considerations are applicable to the development of mail- 
order houses, department stores, and chain stores ? What special con- 
siderations are particularly applicable in each case ? 



THE ADMINISTRATION OF MARKET PROBLEMS 255 

33. Does the department store eliminate the jobber? Does it eliminate 
the jobber's functions? Answer the same questions for the chain 
store and the mail-order house. 

34. Does the chain store eliminate the retail store? In case of a manu- 
facturers chain is jobbing eliminated ? 

35. Does the co-operative scheme eliminate the retail store? Jobbing? 

36. What are the advantages and disadvantages of massive retail trade as 
compared with small scale retail trade in the task of lowering costs of 
distribution ? 

37. "As a distributing device the public market looks simple — almost ideal 
— but the conditions of village and country life, of simple family wants, 
and of home industry, have largely passed away, and with them has 
gone the need for the public market." Do you agree ? If so, why are 
there still public markets ? 

38. Can the middleman be eliminated ? Answer fully. 

39. You are about to engage in manufacturing commodity x. Do questions 
18 to 38 raise issues which you need to understand? 

40. Let us assume that costs of distribution are, speaking generally, very 
great in comparison with costs of manufacture. Can you construct a 
practical program for lowering these costs for the country as a whole ? 

41. "It is a mistake to try to discuss market structures in general. They 
vary from case to case and according to the work to be done." Defend 
or attack. 

42. "The reason why manufacturers have middlemen market their goods 
at all is that they, the middlemen, can perform the marketing functions 
more cheaply than can the manufacturers themselves." How is this 
possible? Is the case for a large manufacturer any different from 
that of a small manufacturer ? 

43. Other considerations than mere cheapness or economy in marketing are 
often controlling motives for a manufacturer to assume the marketing 
functions." What are these "other considerations" ? 

44. "Well may a manufacturer hesitate before he undertakes to develop 
the organization and assume the expense of performing the marketing 
functions." What considerations enter into his decision? 

45. "The tendency in modern merchandising seems to be for the manu- 
facturer to assume more and more of the marketing functions." What 
grounds has the writer for making this statement ? 

46. "The great initiatives in distribution during the last 30 years have all 
been breaks with merchandising traditions." Illustrate by specific 
example what the author has in mind. 

47. What is the jobber mix-up ? " The whole mix-up has been caused by the 
attempt of some manufacturers or wholesalers to cut out one or more 
steps in the old-time distributive process, which was from manufacturer 
to jobber to retailer to consumer." Why are such attempts being made ? 

48. Draw up an outline of the main points in this section. 



256 BUSINESS ADMINISTRATION 

i. THE FORCES BEHIND MODERN MARKET 
STRUCTURES 

The outlines of modern marketing structures will be more clearly 
denned in our minds if we have some appreciation of the forces which 
have shaped and are now shaping these structures, for, here as 
always, institutions have emerged and are emerging in terms of needs 
and of shaping forces. 

We have already taken (see pp. 16 and 153) quick surveys of 
the forces that have been responsible for the break-up of the medieval 
economy and the emergence of our present economic organization. 
It is desirable, for our present purposes, to sketch in more detail some 
of the outstanding happenings of the last one hundred and seventy- 
five years. 

We know that by 1750 English economic development had 
reached a stage which made possible that sudden change which we 
now call the Industrial Revolution. Governmental stability had 
created an environment in which political uncertainties, with their 
attendant hampering of economic development, were at a minimum; 
the beginnings of modern experimental science had laid the founda- 
tions for the development of modern technological industry; the 
expansion of the market (which had been really quite considerable 
in the period from 1300-17 50) had developed and had tested com- 
mercial devices and structures; financial institutions had reached 
the stage where they could make significant contributions to the 
capital formation necessary under a regime of machine industry; 
risk-bearing institutions, notably the exchanges and insurance com- 
panies, were ready to play their part; in brief, the stage had been 
set for the entrance of the new economic order. 

The outer habiliments of the new order were machine industry 
and indirect costs; the inner spirit was a complex of private property, 
laissez faire competition, the gain spirit, and customary survivals. 
It quickly demonstrated its powers for increased productivity of 
economic goods ; so quickly, indeed, that industry after industry and 
nation after nation welcomed it and gave it dominance. It is our 
present purpose to see what this new order meant so far as marketing 
structures are concerned. 

We shall be able to see this more clearly if we divide the period 
since 1750 into two periods. The first, running from 1750 to 1880, may 
be called the period of the emphasis upon production and the all but 
universal acceptance of the orthodox system of distribution, or 



THE ADMINISTRATION OF MARKET PROBLEMS 257 

" marketing through the producer to the wholesaler to the retailer 
to the consumer." This was the first phase of the revolution. The 
second phase (1880- ?) is still with us. It is marked by increased 
emphasis upon production at lower cost and by the development of 
many other systems of distribution (such as direct selling, chain 
stores, mail-order houses, etc.) alongside the orthodox system. 
Of course, the dates used in this statement are arbitrary. The 
actual dates varied from industry to industry and from nation to 
nation and were in no case single years; they were always transition 
periods. So also the characterization of the periods is arbitrary, being 
designed to suit our present needs. These commercial and industrial 
changes are in fact only a part of the full story. To tell the full 
story would be to tell of no inconsiderable portion of human endeavor 
and aspirations of the last two centuries. 

Speaking broadly, the outstanding feature of the first period for 
our purposes is the fact that the market was expanding more rapidly 
than productive power was increasing. This statement is at first 
thought a bit surprising, for we think, properly enough, of this period 
as the one of the coming in of machine industry; as one of a tre- 
mendous increase in producing capacity. This is entirely true, but 
it is also true that the market increased even more. 

This rapid increase of the market was in part due to technological 
industry itself. In the form of the canal, the railroad, the telegraph, 
and the telephone, technology opened markets in an astounding 
fashion. Of course, the way had been prepared. The preceding 
period had been one of colonization by the European nations. This 
colonization had opened the edges of the continents of North America, 
South America, Africa, and Australia and had made possible the 
political organizations under whose auspices modern economic com- 
munities could arise and technological industry could develop the 
markets for its own products. Then, too, the spread of printing 
and of formal education contributed to a reaching for a higner stand- 
ard of living at the very time when increased production made 
measurably possible the attainment of the higher standard. Not 
even the most rapid increase of population the world has known 
served to check the rise of this standard. It served mainly to expand 
still more the market for goods. 

In such a situation the typical producer of goods for individual 
consumption found himself in a position which called for less worry 
over marketing problems than over production problems. The 



258 BUSINESS ADMINISTRATION 

market seemed ready to absorb output at almost any reasonable 
cost, and if perchance one market was lost another rose to take its 
place. Under such circumstances it was natural for two very inter- 
esting sets of institutions to be emphasized. Upon the one hand the 
producer, not greatly disturbed over any possible loss of control of 
his market, was willing to delegate marketing functions to the jobber 
or wholesaler. Presumably the jobber, eager to get goods which he 
could market, would "play fair"; if he did not, there were other 
jobbers eager for the goods. The producer, reasonably sure of a 
market in either event, and still somewhat under the influence of 
the traditions of simpler industry when overhead costs were not 
such a burden as they are today, did not trouble himself much over 
the possibility that he might have to change "his line" because of 
lack of market, and accordingly acquiesced and indeed co-operated 
in establishing the orthodox system of distribution. Of course, few 
if any producers reasoned it out in such terms. They simply drifted 
with the tide. We today can sense the direction of that drift. 

The other interesting set of institutions — the schools of tech- 
nology — arose out of the demand for ever increasing producing 
capacity and out of the background of the physical sciences. We 
can now see that it was no accidental matter that such schools arose 
in this period. They were an answer to society's demand, voiced 
through prices established in the mechanism of the market, for more 
and more products. 

With the opening of the commercial revolution, as the second 
phase of the Industrial Revolution is sometimes called, there was a 
shifting of forces. Again speaking broadly, the outstanding feature 
of this second period is the fact that productive power is expanding 
more rapidly than the market. This reversal of currents is partly 
the result of the developments of technology in the earlier period. It 
is partly the result of the fact that the more responsive markets have 
been fairly well exploited. It is partly due to a checking of the rate 
of increase of population. Doubtless there are other causes. 

Interestingly enough, this checking of the rate of increase of the 
market has not meant any diminution in the emphasis upon pro- 
duction. Quite the contrary. The presence of indirect costs in 
modern industry makes any falling off in output a thing to be dreaded; 
any increase in output is a thing to be coveted. The producer is 
therefore in a strange situation. He wishes to increase output at 
the very time when the market is not expanding rapidly. In a 



THE ADMINISTRATION OF MARKET PROBLEMS 259 

sense he is forced to fight against the drift of events and he uses 
any weapons upon which he can lay his hands. For one thing, he 
seeks to get and to hold his market by national advertising, by 
monopoly, by price maintenance, by establishing his own branches, 
by mail selling direct to consumer — by hook and by crook. Here we 
have the outstanding reason for the building up of many systems of 
distribution parallel to the orthodox system — and sometimes sup- 
planting it. For another thing, he strives to reduce his costs, often 
as a means of coaxing the market to respond. Here we catch a 
glimpse of the forces behind cost accounting, scientific management, 
and the increased emphasis upon schools of technology. For another 
thing, he wheedles society into establishing schools of commerce, 
and through them, through government bureaus, and through 
private researches he studies ways to expand the market. For stil] 
another thing, he helps to influence nations to embark upon an 
" imperialistic" policy which has meant a new emphasis upon colonies 
and has contributed not a little to the causes of our Great War. 

Doubtless, we are still too near the events for us to have a well- 
balanced conception of the forces which have shaped and are shaping 
present-day marketing structures. We can, however, enumerate some 
of the major forces and can see, in the rough, how they are working. 

1. The increase which has taken place in market area should be 
enumerated as a background condition — if not a force — which helps 
to explain modern market operations and structures. Upon the one 
hand the space area of the market has been greatly increased by 
improvements in such fields as transportation, communication, and 
administrative control; upon the other hand the time area has been 
increased by various devices ranging from refrigeration to the hedging 
operations of an organized exchange. These increases in area, taken 
with what might be called an increase in the depth of the market 
(greater demand and consuming power) have made necessary changes 
in market structures to meet the new conditions. 

2. Next, we should list the change in the balance of many forces 
as a consequence of which "production is now outrunning the market." 
This has been sufficiently discussed in the preceding pages. It helps 
to explain the origin of many devices for getting and keeping "a 
grip upon the consumer." 

3. The increasing reliance upon the principle of specialization is 
another factor worthy of mention. In part, this reliance is a rational 



260 BUSINESS ADMINISTRATION 

one. Specialization does make possible better quality and greater 
quantity of economic goods and is usually to be encouraged where 
the market is sufficient to justify it. It is quite possible that we 
carry our specialization beyond limits justified by reason. It matters 
little for purposes of our present discussion. The growing reliance 
upon specialization makes the environment a favorable one in which 
to launch new specialized devices in marketing. The diagram on 
page 247 shows how true it is that the history of the development of 
market structures is in part a story of developing specialization. 

The increasing specialization in producers' instruments (for this is 
also a feature of modern specialization), coupled with the tendency to 
large-scale production, plays its part in determining market structures. 
It is increasingly difficult to transfer specialized capital from one 
"line" to another without great loss. It is accordingly increasingly 
important to keep a grip upon the consumer so that this transfer 
may not be necessary. Marketing devices are therefore built up 
which will aid in holding the consumer. 

4. Closely related to all this is the growing importance of indirect 
or overhead costs in industry. We have already seen that these costs 
make increased output a thing to be coveted. In a business where 
the major part of the total cost is overhead, a 10 per cent change in 
the volume of the business may very well spell the difference between 
bankruptcy and very large profits. A steady volume of business is, 
furthermore, almost as important as an increasing volume. Small 
wonder that market devices to hold the consumer are emphasized in 
modern industry! 

5. The growing dependence upon large-scale production should 
also be listed as a force which is shaping market structures. Goods 
are made to be marketed. Modern large-scale factory production, 
in and of itself, accordingly leads to increased attention to marketing, 
both in order to secure the large demand which will enable the increase 
of output and in order to secure the steady demand so essential to 
regular, economical production. Large-scale marketing is therefore 
quite likely to develop parallel to large-scale factory production. 
This tendency is accentuated by certain economies which are possible 
in large-scale marketing, such as those connected with the more 
economical handling of the material, with better prices in large- 
scale operations, with better freight rates for large lots, with better 
research or investigating facilities, with economy of both routine and 
administrative labor, and with economy of capital. Possibly "the 



THE ADMINISTRATION OF MARKET PROBLEMS 261 

economy of large-scale production " is becoming something of a fetish. 
No matter. Our increasing faith in it, justified or not, helps to explain 
the scale of many of our marketing structures. 

6. We should not fail to list the expansion of popular education. 
In 1800 the total number of days of formal schooling of the average 
American citizen was 82; in 1840 it was 208; in 19 16 it was 1,180. 
If these data are taken as samples of what has been occurring in 
popular education it is readily seen how "selling by description" 
(see p. 269) has come to be so widely used. As one example of a 
resultant market structure notice that the mail-order house owes 
much to the spread of ability to read and write. 

7. This leads naturally to our listing the rising standard of living 
as a force which is shaping market structures. We say that " service 
marketing" is frequently more profitable than "price marketing." 
Why ? It gets its appeal through the rising standard of living. Not a 
few of our market structures are shaped in recognition of this appeal. 

8. The steady development of facilitating agencies, such as 
insurance, transport, advertising, finance and administrative- control 
devices, should not escape notice. Of course, they are results as 
well as causes, but they are causes. For example, modern massive 
retail trade is much indebted to the development of modern sound 
large-scale financial institutions. 

9. Not least in importance is the growing tendency toward 
associative effort. Whereas the period prior to 1880 was one that 
put stress upon the competition of specialists, the present period is 
increasingly one of association of specialists, whether competing or 
non-competing. Sometimes this association results from a desire to 
reap the advantage of large-scale operations as ordinarily conceived; 
sometimes it results from the desire to reduce risks by combining 
them or by increasing information (see chap, vii); sometimes it is 
only a vague "setting up of an impersonal device to cope with the 
impersonality of modern society"; sometimes it is a combining 
against a common foe, real or imaginary; sometimes other causes 
are operative. Whatever the causes, there is in men's minds today a 
strong current setting in the direction of associative effort and its 
importance should not be minimized when one is searching for the 
causes of present-day marketing structures. 

10. Developing codes of business ethics and developing standards 
of other aspects of social control of business activities have played 
their part. Selling by description may again be cited in illustration. 



262 BUSINESS ADMINISTRATION 

It is highly dependent both upon formal social control as reflected 
in law and upon informal social control as reflected in codes of business 
ethics. 

By this time it has probably occurred to the reader that this 
catalogue of "market forces" is nothing but a citation of some quite 
"general forces" which are operating in our economic organization, 
with particular reference to the way they affect marketing con- 
siderations. So it is. But that is enough. Look back over the 
catalogue asking whether it helps to explain the emergence of the 
department store, or the chain store, or the mail-order house, or 
direct selling, or any other of the newer market structures. If it 
does, it has answered its purpose. 

2. MARKETING FUNCTIONS 1 

[The function of the market in modern economic society is that 
of assisting in the co-operation of specialists (see pp. 242-47). 
This selection on marketing functions is an analysis, in functional 
terms, of the operations carried on in the market.] 

The services that must be performed in getting commodities 
from producer to consumer are usually called the "functions of 
middlemen"; in the title of this paper they are referred to as 
"marketing functions" because they are not always performed 
by middlemen, but often to a greater or less extent by the pro- 
ducers themselves, and often even by the final consumer. 

The services performed in the marketing process, including 
practically every item in the detailed expense account of . a mer- 
chant or of the selling organization of a manufacturer, can be 
classified under one of the following heads: (1) assembling; (2) 
storing; (3) assumption of risks; (4) financing; (5) rearrange- 
ment; (6) selling; and (7) transportation. [Others have made 
different lists of marketing functions. One such list is as follows: 
(1) information giving; (2) transporting; (3) pricing; (4) title 
transferring and affirming; (5) storing; (6) financing; and (7) risk 
bearing.] 

1. Assembling. — When communities were self-sufficing, there was 
no need of collecting or gathering commodities from distant places. 
But with the development of territorial specialization both in agri- 
culture and manufacturing, the assembling of commodities from 

1 Adapted by permission from L. D. H. Weld, "Marketing Functions and Mer- 
cantile Organization," in American Economic Review, VII (1917), 306-18. 



THE ADMINISTRATION OF MARKET PROBLEMS 263 

various places became a more or less difficult function to perform. 
The term " assembling," as used here, does not mean the actual physi- 
cal transportation of commodities from one place to another, but 
rather the seeking out of sources, the making of business connections 
whereby commodities may be bought, and the study of market con- 
ditions so that they may be bought at the lowest price possible. 

Assembling therefore involves all the services connected with 
buying. Many wholesale houses assemble goods from different 
parts of the country — even from all corners of the earth. They 
have their specialized buyers, who not only go to trade and 
manufacturing centers to buy goods, but who have to make a con- 
stant and continuous study of market conditions, sources of prod- 
ucts, qualities, grades, styles, etc. Many large houses maintain 
permanent buying offices in market centers, as, for example, the 
dry-goods wholesalers of Chicago, who maintain buying offices 
in New York. It is a common practice for wholesalers and even 
large retailers to send buyers abroad, and some, as Marshall Field 
& Company, even maintain permanent buying offices in several 
foreign cities. But the assembling from foreign countries is largely 
performed by a specialized group of merchants known as importers. 

Sometimes the buying function is so difficult and expensive to 
perform that jobbers employ independent purchasing agents in 
distant markets, who buy in larger lots than individual jobbers 
can handle, who have a more expert knowledge of market con- 
ditions and prices, and who keep their clients informed from week 
to week on these matters. This is common in the hardware trade. 
Department stores do not rely on jobbers to assemble goods for 
them. They buy largely from manufacturers, which involves send- 
ing buyers to eastern markets; and some of the largest stores, 
especially in the East, maintain permanent buying headquarters 
in New York. But the majority of department stores cannot 
afford such expensive buying organizations, and although they 
send their buyers to New York, they employ either " resident buyers" 
or their own co-operative buying syndicates to keep them in touch 
with market conditions, to tell them where they can buy to best 
advantage, to execute " fill-in" orders, and to provide desk space 
for their buyers when they are visiting New York. 

Not many years ago, it was the practice of country merchants to 
visit large cities perhaps twice a year to order a sufficient supply 
of goods for the season. This was a cumbersome and costly method 



264 BUSINESS ADMINISTRATION 

of assembling; it involved loss of time, poor selection of goods, 
purchasing too large a stock at a time, and unsatisfactory credit 
conditions. The assembling function for country merchants is now 
taken over very largely by jobbers. 

Many other examples might be given of the importance and 
difficulties connected with assembling. It is one of the principal 
functions of wholesale produce dealers and commission merchants, 
who send solicitors into the producing regions to make business 
connections, who assemble first from one part of the country and 
then from another as crops mature in different climates, and who 
make a continuous study of crop and weather conditions. Brokers 
often help in the assembling function, in connection with both 
agricultural and manufactured products, although they more com- 
monly represent the seller than the buyer. 

2. Storing. — Storing, in its broad sense, means the holding of 
stocks of goods at convenient points. It involves expense for ware- 
house or storage fees, store space, and interest on capital employed. 
Producers have to perform the storage function to a certain extent, 
but they shift it as much as possible to middlemen. Manufacturers 
prefer to manufacture "on order," so that they may deliver the 
finished goods as fast as they are turned out; but many have to 
manufacture "for stock," thereby keeping capital tied up in finished 
goods on hand. 

Retailers perform this function by keeping the shelves of their 
stores filled with goods. The tendency is for middlemen to reduce 
it as much as possible by purchasing goods in small quantities and 
very frequently; because small stock in proportion to sales means 
faster turnover and larger net profits. This tendency is especially 
noticeable among retailers, who shift the storing expense as much 
as possible to jobbers. Jobbers in turn always have warehouses 
with complete stocks, and the fact that retailers are buying in 
smaller and smaller quantities, but more frequently, accounts 
largely for the development of small jobbing centers, as in the 
grocery trade, and for the establishment of branch houses by large 
jobbers, as in the hardware trade. About the only middlemen T/ho 
perform practically no storage function are brokers, manufacturers' 
agents, and purchasing agents. 

The storing function is so difficult and expensive to perform in 
some cases that it is taken over by a specializing set of ware- 
housemen General warehouses are found in all large cities, and 



THE ADMINISTRATION OF MARKET PROBLEMS 265 

in them all conceivable commodities are held. A sugar refiner on 
the Atlantic Coast, for example, needs to keep supplies of sugar 
on hand at large distributing centers throughout the country, and 
he has the choice of building and maintaining his own warehouses 
or renting space in public warehouses. He finds it cheaper to 
pursue the latter course. The large meat-packers, on the other 
hand, find it to their advantage to maintain their own warehouses, 
partly because they require a specialized service and equipment 
not furnished by ordinary warehouses, and partly because they 
do business in large volume. Agricultural products, which are 
seasonal in character, demand special forms of storage facilities, 
usually furnished by independent warehousemen. Cases in point 
are grain elevators, cotton warehouses, and tobacco warehouses. 
And when the element of preservation enters in, cold-storage houses 
are required. The storage function has to be performed all along 
the line, from producer to consumer. Even the consumer, when he 
buys goods in large quantities, performs part of the marketing 
function of storage; but the tendency has been for the consumer 
to shift this function back more and more to middlemen. 

3. The assumption of risks. — Inasmuch as commission merchants, 
brokers, and agents do not take title to goods, they assume very 
few of the merchandising risks; but practically every other middle- 
man, as well as the manufacturer, especially when he produces for 
stock, has to consider the element of risk. The principal kinds of 
merchandising risks may be enumerated as follows: (1) price fluc- 
tuation, (2) destruction by fire, (3) deterioration in quality, (4) 
style changes, and (5) financial risks. [See also chap, vii.] 

Perhaps the most important risk is that of price fluctuation; 
but its importance varies for different commodities. Branded and 
advertised articles are relatively stable in price though during 
war times they too suffer somewhat from price changes. The 
risk of price fluctuation is greater to wholesalers than to retailers 
because of the smaller margins on which the former carry on 
business. Many articles handled by wholesale grocers, such as 
flour and sugar, fluctuate in price very frequently and are handled 
on extremely small margins, and the merchandising risk accordingly 
becomes great. When one buys or sells with the idea of making a 
profit from mere price fluctuations, he becomes a speculator. In 
this sense wholesale grocers often speculate in flour and sugar and 
some other commodities, and oftentimes a large part of their net 



266 BUSINESS ADMINISTRATION 

profits (or losses) is due to this feature of their activities. In the 
case of a few raw products — wheat, corn, oats, flaxseed, cotton, 
sugar, and coffee — price changes are frequent, merchandising risks 
are great, and speculation becomes an important factor. Much of 
the merchandising risk is shifted through the hedging process to 
professional speculators, a specialized class of risk-assumers. 

The risk of destruction by fire is largely shifted to insurance 
companies. Deterioration in quality is a danger affecting prin- 
cipally perishable articles, but to some extent is also a risk factor 
for general merchandise, which may become shopworn. Many 
articles need special facilities for their handling — warm rooms, 
dry rooms, refrigerated rooms, etc.; and the storage houses, as 
well as the railroads, help in the prevention of deterioration. Style 
changes in manufactured goods are analogous to perishability of 
farm products. They constitute an important risk factor in men's 
and women's wear, especially the latter; and the frequency of style 
changes appears to be increasing, as exemplified recently in eye 
glasses and women's footwear. Financial risk appears in loss from 
uncollectible accounts, but may be largely overcome by the main- 
tenance of credit departments. Financial risk is also involved in 
the other forms of financing described below. 

4. Financing. — Middlemen were formerly merchandise bankers. 
This function has been largely taken over by banks, which in this 
sense are middlemen of a specialized kind. And yet we should 
not lose sight of the fact that middlemen still perform extremely 
important financing functions, and in a variety of ways. Perhaps 
the most important is the granting of credit — retailers to consumers, 
jobbers to retailers, and sometimes manufacturers to jobbers. In 
many cases, however, the manufacturer has to be financed: as in the 
cotton trade, where commission houses make advances or endorse 
the mill's paper; or in the silk trade, where raw-silk dealers furnish 
the raw material on six months' time. Furthermore, manufacturers 
are commonly financed by being allowed to draw drafts on day of ship- 
ment, a method also common in financing shippers of farm products. 

The financing function involves the tying up of capital, with 
resulting interest charges, also a line of credit with banks and the 
expenses connected with accounts and collections. On the whole, 
the brunt of the financing burden is borne by the wholesale trades, 
or sometimes by commission merchants. Retailers and consumers 
are generally weak so far as accumulation of capital is concerned, 



THE ADMINISTRATION OF MARKET PROBLEMS 267 

and, on the other end of the marketing chain, manufacturers gen- 
erally find it difficult to finance their own undertakings; so that the 
financing function of the wholesale intermediaries commonly extends 
in both directions. This is especially true in the marketing of farm 
products. Furthermore, the wholesalers, because they are located 
in trade centers and have quick assets, are the ones who are in the 
best position to obtain credit from banks. 

5. Rearrangement. — Rearrangement of commodities involves sort- 
ing, grading, breaking up large quantities into small units, packing, 
etc. This is one of the principal functions performed by many 
merchants in raw materials. Wool dealers, for example, in addition 
to their assembling and financing functions, are practically indis- 
pensable to manufacturers on account of the fact that they are im- 
portant as graders and classifiers, and stand ready to furnish the 
particular quality of wool desired at any time. In the farm-products 
trade, sorting and grading are of supreme importance; further- 
more, these commodities reach large cities in carloads, and have to 
be split up into small quantities, according to the demands of 
individual retailers. This function is important even in the mar- 
keting of standard and non-perishable commodities; wholesalers 
often receive goods in bulk, and have to weigh them out and 
package them. Goods that are already packaged when they reach 
wholesalers are usually put up in cases or cartons, but owing to 
the tendency among retailers to buy in smaller quantities, cases 
have to be broken open, goods in one-third or one-sixth of a dozen 
lots collected from the different cases, and repacked for shipment. 
Even retailers have the function of rearrangement to perform to a 
certain extent. They have to weigh out sugar, coffee, nails, wire, etc., 
and measure and cut cloth; then they have to wrap for presentation 
to customers. 

6. Selling. — Selling is the most important of the marketing 
functions, as well as the most costly one to perform. Salaries of sales- 
men (plus traveling expenses in many cases) constitute generally the 
most important single item iii a merchant's expense account. Sell- 
ing involves both creating a demand for the goods and getting the 
goods into the hands of the purchaser. Though both of these 
phases of selling are performed largely by personal salesmen, de- 
mand creation is being accomplished more and more by means of 
advertising. Advertising is used either because it is the only possible 
way of creating a large consumer demand, or because it is the cheapest 



268 BUSINESS ADMINISTRATION 

way of arousing such a demand. When a manufacturer adver- 
tises, he turns over the actual work of preparing copy, selecting 
mediums, etc., to another functional specialist — the advertising agency. 

It is still necessary for most manufacturers, jobbers, and re- 
tailers to employ personal salesmen, but, because of the great ex- 
pense attached to this method, it is only natural that many of the 
important recent attempts to reduce merchandising costs should 
have been along the line of eliminating salesmen's salaries as much 
as possible. The mail-order houses, both wholesale and retail, 
do away with salesmen altogether; local buying syndicates among 
retail druggists effect their principal saving by substituting the 
telephone for salesmen; the slot-machine does away with salesmen, 
and the slot-machine type of retail store, like the Horn and Hard- 
art restaurants and the " all-package" grocery stores, seems to be 
gaining ground. 

7. Transportation. — Merchandise middlemen formerly attended 
to the actual carriage of goods from one place to another more than 
they do now; but this function has been largely taken over by 
railroads and other transportation agencies that are specialized 
middlemen in this field. Transportation, however, is still an im- 
portant function of merchants. Wholesalers and retailers frequently 
use their own trucks for hauling goods from freight stations to their 
stores, though more commonly drayage companies are employed. 
The principal transportation function still performed by merchandise 
middlemen is that of delivering goods from store to customer. 

As already stated, a clear conception of the marketing func- 
tions is fundamental to a proper understanding of the mercantile 
structure. The splitting up of the marketing process among suc- 
cessive middlemen is merely a case of specialization in marketing 
functions. 

3. METHODS OF SALE AND ADVERTISING 

A 1 

In the early stages of our industrial history, sales were made in 
bulk. At all stages in distribution, the purchaser saw the actual 
goods before the sale was made. 

Adapted by permission from A. W. Shaw, "Some Problems in Market Dis- 
tribution," in the Quarterly Journal of Economics, XXVI (1912), 721-23, 743-46. 
Later published in An Approach to Business Problems. (A. W. Shaw Company, 

xQl6.) 



THE ADMINISTRATION OF MARKET PROBLEMS 269 

Later sale by sample appeared. The purchaser bought goods 
represented to be identical with the sample he was shown. The 
introduction of this method of sale was necessitated by the widening 
of the market and was made possible by improvement in com- 
mercial ethics and by increasing standardization of the product. 
The purchaser must have confidence, not only in the honest inten- 
tion of the producer to furnish goods identical with the sample, but 
also in his ability to produce identical goods. Hence, increasing 
uniformity in product through machine methods of manufacture 
was a factor in the increase of sale by sample. 

Sale by description is the most modern development in distribu- 
tion. An even higher ethical standard is required than for sale by 
sample. Moreover, sale by description requires a higher level of 
general intelligence than sale in bulk or sale by sample. Sale by 
description in its modern development is, in a sense, a by-product 
of the printing press. 

The root idea in sale by description is the communication of 
ideas about the goods to the prospective purchaser by spoken, written, 
or printed symbols. This takes the place of the sight of the goods 
themselves or a sample of them. It is obvious that this requires 
grasp ideas either through spoken, written, or printed symbols. 

The use of the term "symbols" rather than "words" is necessi- 
tated by the fact that photographs and sketches are today an impor- 
tant feature of sale by description. A photograph of the commodity 
often serves the purpose of pages of verbal description. 

Advertising, in the sense here used, is to be defined as the com- 
munication to possible purchasers, by written or printed symbols, 
of ideas about the goods, designed to create a demand for the goods. 
In this broad sense it includes, not only selling letters and circulars, 
but newspaper and periodical advertising, bill-boards and window 
cards, electric signs, street-car advertising, catalogs, and all the 
varied forms of modern commercial publicity. A rough classification 
is made between general and direct advertising. General advertising 
includes newspaper and magazine advertising, bill-boards, electric 
signs, street-car advertising and the like, aimed at the general public 
or some section of it. Direct advertising is used in reference to the 
sending of selling letters, circulars, or catalogs to the persons whose 
names appear on a mailing list and to reach whom the material sent is 
specially adapted. This classification is of some importance in dis- 
cussing advertising as an agency in distribution. 



270 BUSINESS ADMINISTRATION 

We cannot here attempt an adequate discussion of modern 
advertising in its varied phases. And it is perhaps not necessary, 
so much is it today forced upon the attention of each of us. To 
realize the machinery now provided for the direct communication 
of ideas about goods, one has but to consider that a single publishing 
company today reaches through two magazines about three and three- 
quarters million families; that there were in this country in 191 1, 
according to the Statistical Abstract, 22,806 newspapers and periodicals. 
A fair measure of the development of advertising in recent years is 
found in the rapid progress of invention to facilitate advertising — 
photography, the half-tone process of reproducing photographs and 
drawings, the three-color process for such reproduction, the cheapen- 
ing and perfecting of papers, inks, and printing, and better reprodu- 
cing machinery. 

It is necessary to include in this hasty and incomplete analysis 
of advertising as an agency in distribution a reference to the character 
of the demand aroused by advertising. Advertising may be said to 
build up three general classes of demand: (1) expressed conscious 
demand, (2) unexpressed conscious demand, and (3) subconscious 
demand. 

The three classes may be illustrated by supposing a product for 
sale by grocers to be advertised in a periodical of large circulation 
by a double page costing for one insertion $8,000. If as a result of the 
advertisement 30,000 people go to the grocery and buy the product, 
60,000 plan to purchase the product at some future time when such 
an article is needed, and 100,000 more become open to a further 
exciting force, such as seeing the product at the grocery and recogniz- 
ing it as one advertised, then we should call the 30,000 the expressed 
conscious demand, the 60,000 the unexpressed conscious demand, 
and the 100,000 the subconscious demand resulting from the advertise- 
ment. Expressed conscious demand means present sales; unex- 
pressed conscious demand means future sales; subconscious demand 
means that the field has been fertilized so that future selling efforts 
will be more fruitful. Unexpressed conscious demand and subcon- 
scious demand are difficult of measure but must always be taken 
into account in any consideration of the efficiency of advertising as a 
selling agency. 



THE ADMINISTRATION OF MARKET PROBLEMS 271 

B 1 

ORGANIZATION CHART OF AN ADVERTISING AGENCY 

[This statement of the constituent elements of the organization of an adver- 
tising agency serves to indicate the functions of this specialized agency in the 
marketing field.] 

1. Research Plan and Business Counsel Department 

a) Conferences with clients 

b) Market and trade investigations 

c) Analysis and reports 

2. Intelligence Department 

a) Publicity for clients 

b) Statistics and news to clients, from newspapers, magazines, trade 
papers, statistical bulletins, etc. 

3. Copy Department 

a) Advertisements, booklets and folders, circulars, letters, campaign 
portfolios, catalogues, house organs 

b) Trade marks, labels, packages, slogans 

c) Window and counter displays, car cards, posters, theater slides, 
novelties, samples, demonstrations 

4. Art Department 

a) Within the organization 

b) Outside art service 

5. Rate and Space-buying Department, estimating, scheduling, and 

ordering space in 

a) Newspapers, magazines, farm papers, trade papers, class papers 
and miscellaneous publications 

b) Posters and painted signs, street car cards, electric signs, and 
motion pictures 

6. Mechanical Production Department 

a) Halftones, zincs 

b) Electrotypes, stereotypes 

c) Typesetting 

d) Printing 

e) Shipping 

7. Service Department 

a) Job orders to all departments 

b) Following orders to completion 

c) On time forwarding of copy and cuts 

d) Job reports to clients 

1 Adapted by permission from the organization chart of Johnson, Read & 
Company, Chicago. 



272 BUSINESS ADMINISTRATION 

8. Filing and Checking Departments 

a) Filing publications 

b) Filing data, proofs, etc. 

c) Checking insertion 

9. Financial Department 

a) Credit 

b) Accounting 

c) Auditing 

d) Billing 

e) Collections 

10. Extension Department 

a) Organization or House Advertising 

b) Organization or House Salesmen 

c) Organization or House Conferences 

4. CONDITIONS WHICH MAY RESULT IN ORGANIZED 

MARKETS 1 

"An organized market" is one the proceedings of which are 
formally regulated. As a rule those who deal on it are in effect a 
a corporation: they elect new members and also the executive 
of their body and appoint the committee by which their own regula- 
tions are enforced. In some countries their status is fixed and their 
actions are superintended by Government. Their regulations 
generally provide, implicitly or explicitly, for the completion of a 
contract to buy or sell a quantity of a definite commodity at a cer- 
tain price, by the utterance of a few words on the one side, and by 
a brief response, sometimes a mere nod, on the other. They gen- 
erally prescribe a rather large unit as that to which the contract 
refers, at all events in the absence of any specific statement to the 
contrary. 

The chief conditions needed for rendering any class of products 
suitable to be handled in an organized market are, (1) that it be not 
quickly perishable; (2) that the quantity of each thing can be 
expressed by number, weight or measure; (3) that its quality can 
be determined by tests that yield almost identical results when 
applied by different officials, assumed to be expert and honest; and 
(4) that the class is important enough to occupy large bodies of 
buyers and sellers. 

1 Adapted by permission from Alfred Marshall, Industry and Trade, pp. 256-58. 
(The Macmillan Company, 19 19.) 



THE ADMINISTRATION OF MARKET PROBLEMS 273 

These conditions are sufficient to render organized marketing 
practicable. But a fifth condition is required to make it attractive: 
it is that the class of things dealt in should be generally liable to con- 
siderable fluctuations in price. For otherwise the dealings would 
be confined almost exclusively to producers, consumers, and mer- 
chants: there would be little scope for those professional dealers who 
make a living by speculative purchases and sales; and who in some 
cases render great public services by carrying risks that would other- 
wise need to be borne by people whose special aptitudes lie in other 
directions. It is true that this beneficent work is often marred, and 
sometimes over-borne, by evil practices which intensify fluctuations 
and mislead honest dealers: but, for the present at least, that evil 
has to be taken with the good. An organized market generally gives 
scope for purchases and sales for immediate delivery; and for deal- 
ings in "futures," that is in goods to be delivered at specified future 
times. 

This fifth condition implies that the things in question are not of 
such a nature, that their supply can be varied by rapid and extensive 
changes in the rate of production; so that their price is prevented 
from fluctuating rapidly, and remains always close to normal cost of 
production. There are few material things which satisfy all these 
conditions in very high degree: the chief among them are various 
grains, especially wheat; and raw cotton. The authorities of each 
organized produce market define the standard, or standards, in 
which dealings may be made; and all produce, which comes for 
delivery in these dealings, is inspected and certified as being truly up 
to the standard which it claims. 

Comparatively few transactions in futures lead to the actual 
delivery of the produce. In most cases the buyer pays to the seller 
any amount, by which the official price of the quantity sold may 
have fallen below that at which the sale was made; or receives from 
him any amount, by which it may have risen. Either side may insist 
on completion: but that is generally effected through the organiza- 
tion of the exchange, by bringing together those who wish actually 
to deliver with those who wish actually to receive; the rest being 
"rung out." The practical effect of this is that anyone can as a 
rule buy a future, without being called upon to pay its price either 
at the time of making the contract, or afterwards. Each party is 
required to put in a "margin," which will cover a small movement 
of the price against him: and, as soon as the price moves considerably 



274 BUSINESS ADMINISTRATION 

against him, he is likely to be required to make a corresponding 
addition to his margin. 

See also p. 688. The Hedging Operations of an Organized 
Exchange. 



5. LEADING WHOLESALE AGENCIES 1 

Wholesale merchants are business men who buy and sell mer- 
chandise on their own account for distribution to retailers in lots 
smaller than those in which the wholesaler buys. The wholesale 
merchant is a large factor in the distribution of many products to 
unit stores. Although there are some manufacturers who sell their 
merchandise direct to retail grocers, for example, nevertheless they 
constitute but a small minority. Such manufacturers, furthermore, 
find it necessary practically to duplicate the organization and to 
assume the functions of the wholesale grocer, usually incurring at 
least as much expense as the wholesale grocer incurs in operating his 
business. 

The specialty wholesaler represents a differentiation from the 
ordinary wholesale merchants, such as are referred to above. In 
New York, for example, there are a number of wholesalers who 
handle only hosiery and knit goods. The tea and coffee whole- 
saler is another specialty merchant. These specialty wholesalers 
generally cover a wide territory in the sale of their products and 
develop a demand through especial care in the selection and quality 
of the merchandise that they handle. 

There are a few catalogue wholesalers in the United States. One 
of the most notable examples of these is Butler Brothers of Chicago. 
The catalogue wholesaler does not employ a force of traveling sales- 
men but sells on mail orders. 

Merchants' co-operative wholesale associations, or buying ex- 
changes as they are sometimes called, have been developing more 
rapidly during the last ten years than prior to that time. The 
oldest of them have been in existence for twenty-five years or more. 
These co-operative buying associations have had their greatest 
development in those trades in which the wholesale merchant is also 
a large factor. They are direct competitors of the wholesale mer- 
chant, but in the grocery trade at least the co-operative buying 
associations deal chiefly in staple merchandise. 

Adapted by permission from M. T. Copeland, "Scope and Content of a 
Course in Marketing," in Journal of Political Economy, XXVIII (1920), 375-98. 



THE ADMINISTRATION OF MARKET PROBLEMS 275 

The fruit-and-produce trade presents a series of particularly 
complex marketing problems. They are concerned primarily with 
the large urban markets. The inhabitants of the large cities and the 
industrial districts of the United States are supplied with fresh fruits 
and vegetables from a wide area. The trade is one of especial 
difficulties because of the fact that a constant, regular flow of mer- 
chandise is essential and also because of the perishable nature of 
the merchandise, which involves danger of loss through spoilage or 
through glutted markets. 

The commission merchant is one of the chief agencies for the 
handling of fruit and produce in large cities. Ordinarily the com- 
mission merchant receives shipments on consignments from farmers 
or from country dealers. These shipments are sold at the prices 
that are current when the shipments arrive. After deducting his 
commission fee and any incidental expense that he may have incurred, 
the commission merchant remits the balance to the shipper. This 
system enables the shipper to ship his merchandise whenever it is 
ready without awaiting specific orders from the commission mer- 
chant. It also enables the shipper to obtain the benefit of the 
prices that are current at the time that the shipments arrive at the 
market. 

Many commission merchants, furthermore, buy and sell on their 
own account, thus acting as jobbers. This combination of a com- 
mission merchant and a jobbing business, while it has some advan- 
tages occasionally even to the shipper, has not ordinarily worked out 
well in any industry in the long run. The conflicts of interest tend 
to create distrust and dissatisfaction. 

In the large urban markets there are several other agencies 
through which produce may be sold. There are car-lot receivers 
who buy outright on their own account. Some of these receivers, 
and also some of the other types of middlemen, send out buyers to 
purchase produce or to contract for it in the growing districts. 

The broker, who handles a portion of the trade in produce, sells 
for a brokerage fee shipments consigned to him. Ordinarily the 
broker, however, sells only upon confirmation of the price by the 
shipper. The broker as a rule deals only in car lots. 

The jobber in the fruit-and-produce trade buy& from car-lot 
receivers, brokers, or commission merchants, and sells to retailers. 
He performs the regular wholesale merchants' functions. 



276 BUSINESS ADMINISTRATION 

The trade in citrus fruits and occasionally in other products in 
several large cities is carried on through auctions. These auctions 
are ordinarily held daily, and sales are made directly at the freight 
terminal to jobbers and large retailers. The auction system can 
be used advantageously only where there are large shipments of 
carefully graded produce. 

A notable development in the field of marketing during recent 
years has been the growth of the California Fruit Growers' Exchange, 
probably the most successful example of a co-operative association 
of producers. The success of this organization has undoubtedly been 
due in part to special circumstances, such as the specialized, capital- 
istic nature of the industry, an all-the-year-round production, and 
previous experience in co-operative efforts for other purposes. Not 
least, among other reasons, is the distance from the market, which 
has placed a premium upon the effective control of shipments, with 
diversion in transit in order to have the fruit delivered at the markets 
paying the best prices and to avoid gluts. 

There are numerous instances of manufacturers who have estab- 
lished wholesale branches for the distribution of their products 
directly to retailers. They have thus assumed completely the func- 
tions and the expenses of the wholesale merchant. In few cases 
does it appear that there has been a substantial saving in expense 
by the adoption of this policy. The objects have generally been to 
facilitate more aggressive selling or to meet some special conditions 
in the industry. 

Frequently a manufacturer feels that his product does not 
receive enough individual attention from the wholesalers and their 
salesmen. He believes that by coming directly in contact with 
retailers, he will be able to push his goods more effectively against 
the products of his competitors. He values the good will of the 
retail merchants and believes that he can secure it more certainly by 
dealing with them directly. In other instances, the manufacturer 
establishes a system of wholesale branches in order to maintain a 
more steady production load for his factory. With a system of 
wholesale branches the seasonal fluctuations in the volume of sales 
may be lessened. Among the industries in which the operation of 
manufacturers' wholesale branches is conspicuous is the meat- 
packing industry. 

See also p. 56. The Location of the Wholesale Dry-Goods Trade. 



THE ADMINISTRATION OF MARKET PROBLEMS 277 

6. MARKETING AGENCIES BETWEEN MANUFACTURER 

AND JOBBER 1 

This class of middlemen comprises commission houses (some- 
times known as selling houses), manufacturers' agents, brokers, and 
purchasing agents. Commission houses are common in the cotton, 
woolen, and silk goods trades, and are found to a certain extent in 
the hosiery and knit goods and ''notions" trades. Manufacturers' 
agents are common in the grocery and hardware trades, and brokers 
are very important in the grocery trade. An interesting form of the 
purchasing agent is found in the hardware trade. Similar middlemen 
appear to a certain extent in other trades, but the reason for their 
existence and their methods of doing business may be understood 
by studying them in connection with the three trades enumerated 
above, viz., textiles, hardware, and groceries. 

It appears that intermediaries between manufacturers and jobbers 
perform but few of the marketing functions mentioned in Selec- 
tion 2. They rarely store any commodities for their principals; they 
assume but little risk because they do not take title to the 
goods; they have practically no sorting and grading because they 
sell in large quantities and rarely handle the goods at all; and 
they do none of the transporting. This leaves the actual selling 
of the goods, which is their most important function; financing, 
which is important in the textile trades but not in the hardware 
and grocery trades; assembling, which they perform by represent- 
ing manufacturers who are often located in different parts of the 
country. 

The purchasing agent is fairly distinct from the other three forms 
of middlemen described here because he represents buyers rather 
than sellers, but it is rather difficult to draw clearly the lines of 
demarcation between commission houses, manufacturers' agents, and 
brokers, especially as they merge into each other in certain cases. 

The distinguishing features of commission houses, which are 
found primarily in the textile trades, appear to be as follows: They 
generally market the whole output of each mill that they represent 
or the whole output of at least one of the mill's products, such as its 
cotton yarn, or its woven fabrics; their financing function is much 
more important than in the case of brokers and manufacturers' 
agents; they handle goods of the same kind for different mills; 

1 Adapted by permission from L. D. H. Weld, "Marketing Agencies between 
Manufacturer and Jobber," Quarterly Journal of Economics, XXXI (1917), 571-99. 



278 BUSINESS ADMINISTRATION 

they usually have more power in determining the price at which 
goods shall be sold than do the other two kinds of middlemen; they 
handle goods which are not usually branded and advertised; they 
receive their compensation in the form of a percentage commission 
on sales; they often perform the additional service (which may be con- 
sidered a part of the selling functions) of furnishing designs for the mills, 
and telling them what fabrics and designs to run through the looms. 

The distinguishing features of the manufacturers' agent, who is 
found in the hardware and grocery trades, appear to be as follows: 
They more commonly sell for their clients in a restricted, though 
fairly extensive, territory, so that a manufacturer may have two or 
more agents in different sections of the country — though there are 
exceptions to this, especially in the hardware trade; their financing 
function is unimportant as compared with commission houses, 
inasmuch as they rarely make advances to or otherwise finance 
manufacturers; they handle a variety of goods of the same general 
class, such as various kinds of hardware, but they sell each particular 
article for only one manufacturer; sometimes, especially in the 
grocery trade, they handle branded and advertised goods; similar to 
commission merchants, they usually receive their compensation in 
the form of a percentage commission, but sometimes they receive 
salaries or lump-sum annual payments, and not infrequently flat 
rates per package of goods sold; they usually have to follow the 
prices set by the mills, rather than enjoy the privileges of setting 
prices themselves. 

The distinguishing features of brokers, at least as they appear 
in the grocery trade, are as follows: Their field of activity is more 
limited than in the case of commission houses and manufacturers' 
agents, since they frequently sell to jobbers only in the city where they 
are located; the "pure" broker does not represent any particular 
manufacturer, but places his orders from purchasers with any manu- 
facturer whom he may select at the time (there is a tendency for 
so-called brokers to represent definite manufacturers in restricted 
markets); they usually have no financing function; they sell the 
same kind of goods for different manufacturers; they handle princi- 
pally unadvertised goods; they usually receive flat rates per package 
or per carload, rather than a percentage compensation; they have 
very little leeway in determining prices, usually having to get them 
"confirmed" by manufacturers. 



See also p. 367. Buying for Retail Hardware Stores. 



THE ADMINISTRATION OF MARKET PROBLEMS 279 

7. THE USE MADE OF THE JOBBER 1 

What is a jobber ? To the man on the street the jobber is a large, 
important commercial house, ranking in stability with the best 
institutions in the community. Its working capital is relatively 
large. Its credit rating is excellent. It is an institution whose 
whole business is to buy goods and re-sell them to retailers. It is a 
specialized organization for marketing — a sales organization first, 
last, and always. That is about as far as the average man's notion 
of a jobbing house goes. 

But much more is involved in the work of the jobber that becomes 
apparent only with a closer view than most people are permitted. 
The jobber studies the consumer's needs of his trade territory, deter- 
mines what the people will want, and then sets out months in advance 
of the actual demand to assemble the goods to satisfy the needs, 
drawing upon all parts of the world. Assembling the merchandise 
that people will want next season is an enormous social responsibility 
when you stop to think about it. A grocery jobber must secure 
from two thousand to five thousand items. He must buy from 
hundreds of producers, thousands in some cases. A superficial 
count of the countries of origin of the merchandise of a single jobbing 
concern showed that there were over thirty countries represented. 

To care for these incoming goods, storage must be provided, 
warehouses that will keep the goods safely and free from deterioration 
of any kind, whether from weather, temperature, fire, dust, vermin, 
or what not. The jobber's warehouse is the source of supply of most 
retailers for most goods. 

It should be kept in mind that the jobber of today is generally 
and essentially a local institution. Not many grocery jobbers can 
sell large volumes of goods more than a hundred miles away. The 
jobber's strong points of service are that he carries a large open stock, 
from which the retailers within a certain radius can order through 
salesmen, by mail and wire, and secure the goods in a few hours, 
that orders can be made up for practically everything the retailer 
wants, and in such quantity as desired. 

The advantages of the jobber to the manufacturer or producer 
are obvious. Months in advance of consumption and in advance of 
the retailers' orders the jobber places his orders and thus relieves 
the manufacturer of watching the market and making his own studies 

1 Adapted by permission from P. H. Nystrom, "The Jobber's Indispensable Place 
in the Economic World," in the Journal of Commerce (July 9, 191 7), 13-15. 



280 



BUSINESS ADMINISTRATION 



of consumers' demand. A great many manufacturers are saved 
practically all selling expenses by selling their entire product to one 
or a few jobbers by contract for the season, year, or in large quantities 
at a stated time. 

A POSSIBLE WHOLESALE ORGANIZATION 1 



STOCKHOLDERS 
1 



BOARD OF DIRECTORS 



PRESIDENT AND 

GENERAL MANAGER OR 
EXECUTIVE COMMITTEE 
1 



IcouictmJ 



A89T. 
MDSE. MGR. 




OFFICE 



C^c^CS] 





ADV. 

MANAOER 




ROA0 

SALESMEN 








ISSHSSl 


i i 


1 ""«» , | S3." | 






1 "'"• 1 

Imomotiom] 





GENERAL 
SALESMEN 




SAMPLE 
ROOM 






1 




Ls. 



OFFICE MANAGER 



lE3E3!Se BLlSBa 



Check this diagram with the marketing functions listed on page 262. 
the two agree ? Do they coincide in plan ? 



Do 



it is easy to underestimate the value of and the necessity for 
salesmen. The mail-order exceptions merely prove the rule. Even 
government bonds cannot be sold without salesmen and sales organi- 
zation. The jobber's salesman represents a large line of goods 
co-operatively handled. I have never heard of any manufacturer 
claiming that he could sell his product at a lower selling expense 
than the jobber. 



1 Taken from J. 
Institute, 191 7.) 



B. Swinney, Merchandising, p. 40. (Alexander Hamilton 



THE ADMINISTRATION OF MARKET PROBLEMS 281 

The credit man of a jobbing house performs a service in stabiliz- 
ing business that is highly creditable. His knowledge of his customers 
extends to matters purely personal and of character in detail, as well as 
of business matters. He is able to judge with great precision how 
far the retailer may extend his business. If jobbers were to eliminate 
all of the trade with retailers who are classed as bad credit risks by 
some manufacturers, great hardship would ensue in many parts of the 
country. The line between success and failure is often finely drawn, 
but the skillful local jobber's credit man stands in much better position 
to discern it than the distant manufacturer's credit department. 

Manufacturers who sell direct are merely developing complete 
jobbing organizations of their own, duplicating in detail what already 
exists. I do not say this is unnecessary. There are some lines of 
merchandise that require special organizations, but for the majority 
of lines and their manufacturers the jobbing system appears to 
serve very adequately. 

That the wholesaler performs an economic service to the retailer 
is clearly evidenced by the fact that more than 80 per cent of the retail 
merchandise of the country is bought through jobbers. The jobber 
maintains a constant, open supply close at hand. Orders may be 
sent in at any time and for smaller quantities than manufacturers 
care to handle for the retailer. Orders can be made out for a large 
variety of goods and all will be filled from source of supply. One 
order for twenty-five items, instead of twenty-five orders, to as many 
manufacturers means a saving of time, postage, stationery, and 
accounting. 

Transportation charges are reduced to a ininimum. Both time 
and money are saved. Most jobbers fill practically all orders on the 
day they are received. Buying in small quantities of each item makes 
rapid turnover possible and consequent pro rata reduction of over- 
head expenses, resulting in higher profit per sale and each profit 
multiplied by the turnover. Manufacturers, as a rule, while making 
price concessions require the retailer to buy in larger amounts than 
the jobber. But what the retailer gains in price he sacrifices in 
higher overhead, shrinkage, and waste. 

The small retailer must, of physical necessity, patronize a jobbing 
institution. If he were to buy all his goods from individual manu- 
facturers he wouldn't have any time left in which to sell his goods. 
In dealing with manufacturers the retailer is required to pay out 
large sums of money, sometimes at inconvenient times, whereas 



282 BUSINESS ADMINISTRATION 

the jobber's times and terms of settlement are regular and may. be 
easily provided for in advance. 

There is another important function of the jobber, and that is the 
educational help given to the retailer. The jobber's salesman is 
frequently the teacher of the retailer, showing what the demand will 
be, how to prepare for it, what sales methods to use, and so on. This, 
without doubt, has been an important factor in the success of many 
retailers. 

We may summarize the functions of the jobber to manufacturers, 
retailers, and to the public by stating that he is the specialist in dis- 
tribution on a large scale. We need specialists in manufacturing. 
We need specialists in professions. We need specialists in every 
work. And we need specialists in marketing. 

It should be obvious to anyone, with the facts concerning the 
work that jobbers actually do before him, to see clearly that the 
jobbing system, or some system very much like it, is absolutely neces- 
sary and is here to stay. His precise functions will vary from time 
to time as they do now from community to community and from 
line to line. But the study of market demand in a broad way, the 
assembling of merchandise in large quantities from the widest sources, 
months, and even seasons in advance of the actual demand, the 
redistribution of these products in such quantities as desired at the 
precise times when needed are functions that must be carried on 
some way and by someone. 

8. LEADING RETAIL AGENCIES 1 

A large majority of the retail stores in the United States are 
what I prefer to call unit stores. Sometimes they are called " inde- 
pendent" stores or "regular" stores. A unit store is a store without 
an elaborate departmental organization that is owned and managed 
as an independent unit for the sale of goods through personal sales- 
manship. Unit stores are used most extensively for the distribution 
of merchandise such .as groceries, hardware, agricultural imple- 
ments, shoes, men's clothing and furnishings, jewelry, cigars and 
tobacco, and drugs. 

Unit stores furnish the most numerous outlets for many kinds 
of merchandise. They provide the only means whereby large num- 
bers of consumers can be reached regularly. They are adaptable to 

1 Adapted by permission from M. T. Copeland, "Scope and Content of a 
Course in Marketing," in Journal of Political Economy, XXVIII (1920), 375-98. 



THE ADMINISTRATION OF MARKET PROBLEMS 283 

the service requirements of their patrons. Frequently the proprietor 
of a unit store has built up a strong personal clientele. The market 
for merchandise distributed through unit stores is not dominated by 
a few large powerful buyers. 

A manufacturer who elects to distribute his product through 
unit stores, however, encounters difficulty in inducing a large num- 
ber of individual retailers to handle his product effectively. While 
there are many notable exceptions, nevertheless a considerable pro- 
portion of unit stores are not operated efficiently. The selection of 
this type of store as the marketing agency, therefore, presents a series 
of difficult, complex problems. 

For some commodities a manufacturer finds it advantageous to 
select unit stores to act as exclusive agents. This policy is exemplified 
by several large clothing manufacturers. Other clothing manufac- 
turers, whose product is probably of equal merit, follow the opposite 
policy of not building up a system of exclusive agencies. This is one 
of the large problems of sales policy, because there are substantial 
reasons for and against this system. 

Another type of store that is generally operated on the unit 
principle is the company store. This has come into especial promi- 
nence during the last few years of rising prices. The American 
Woolen Company, for example, has recently established a store at 
its plant in Lawrence, Massachusetts, for the sale of merchandise 
to its employees. Similar stores have been organized by several 
other large employers of labor. To the manufacturer or wholesaler 
seeking distribution for his product, the company store presents a 
problem because of the doubt as to its permanency and the friction 
that it causes with many of the unit stores with which it competes. 

The retail-wholesale store is another institution that complicates 
the sales problem for many a manufacturer. Such a store is one 
that carries on a retail business and also operates a wholesale depart- 
ment. A store of this type ordinarily demands wholesalers' discounts. 
It is, therefore, in a position to buy goods for its retail department at 
manufacturers' wholesale prices. It oftentimes becomes a trouble- 
some competitor of the unit stores, to which the manufacturer can- 
not afford to sell at wholesale and which are forced to buy from 
wholesalers at prices higher than the wholesale-retail store purchases 
its merchandise. 

The metropolitan specialty store, especially for articles such as 
women's wearing apparel, has become an important factor in the sale 



284 BUSINESS ADMINISTRATION 

of some kinds of merchandise. This type of store has operating 
expenses quite similar to those of the other types of stores with which 
it competes. Its main advantages appear to be those that accrue 
from specialization. 

A department store, according to the customary usage of the 
term, is a retail store organized on a departmental system in which 
one of the large departments is dry goods. Wherein does the depart- 
ment store have its chief advantages ? Its size frequently gives it a 
buying advantage. Oftentimes it is able to obtain wholesale prices 
or high discounts because of the large quantities that it purchases. 
Its size, however, does not give it any advantage apparently in 
operating expenses. From such scanty information as is now avail- 
able it appears that the ratio of operating expenses to sales is as high 
in department stores as in unit stores. Frequently the expenses are 
higher in department stores in proportion to sales. Some of the 
failures of department stores during the last ten years have been 
due, I believe, to a mistaken theory that a large volume of business 
necessarily meant economy in operation. 

The chief advantage of a department store, it seems to me, is the 
facilities that it offers for shopping. A department store is essentially 
a shopping institution. It is a strong factor in the trade in women's 
wearing apparel, for instance; but as a rule the department store 
has not been able to make a success of a grocery department. It 
cannot operate a grocery department ordinarily as cheaply as a unit 
store is operated. The buying habits of the consumers, furthermore, 
lead them to patronize unit stores for the bulk of their purchases 
of groceries. 

A chain-store system is a group of scattered stores with single 
ownership and centralized management. Ordinarily a central ware- 
house is operated from which merchandise is distributed to the retail 
branches. The chain-store system has the advantages of large-scale 
buying and wide dispersal of the individual retail branches. It has 
facilitated the development of standardization of equipment and of 
methods of operation and management. Chain stores have been 
most successful in marketing those products that ordinarily are sold 
through unit stores. Chain stores are located at points where it is 
most convenient for their patrons to visit them. 

While the chain store undoubtedly has definite advantages such 
as have been mentioned, it also is at a disadvantage in some respects 
in competition with unit stores. The chain-store system is less 



THE ADMINISTRATION OF MARKET PROBLEMS 285 

flexible. It cannot readily adjust its services, such as delivery and 
credit, to meet the needs of the individual patrons. Moreover, the 
advantages that the chain-store system gains through centralized 
buying and standardization of management methods are offset, in 
part at least, by the necessity of operating a central warehouse and 
especially by the difficulty in securing managers who will take a keen 
personal interest in the conduct of these stores. Expenses must 
also be incurred for policing the branches: a system of frequent, 
close inspection is necessary in a chain-store system. 

Inasmuch as many of the chain-store systems have cut prices, 
they are looked at askance by numerous manufacturers who believe 
that their main reliance must be placed upon unit stores. The 
friction between chain stores and unit stores has been a matter of 
grave concern to many a manufacturer during the last ten or fifteen 
years. 

Occasionally a manufacturer decides that a system of manu- 
facturer's retail branches is the logical outlet for at least a part of 
his merchandise. The establishment of retail branches by a manu- 
facturer is not ordinarily, however, for the purpose of economy in 
expense of operation. It seems to have been the general experience 
of manufacturers who have established retail branches that they are 
not able to operate their stores more economically than the average 
unit store or department store is operated. Such branches generally 
have been established for other reasons. One of these reasons is to 
insure a steady, sure outlet for at least a portion of the manufacturer's 
product. There are also several instances in which manufac- 
turers have established a small number of retail branches for educa- 
tional and promotional work. Whenever a manufacturer decides to 
open up a retail store, he finds immediately that his action is capital- 
ized by his competitors, who seek to develop a spirit of antagonism 
among retailers on the ground that the manufacturer is entering 
into direct competition with his own customers. 

A mail-order house ordinarily is a business that sells at retail 
from catalogues and not over the counter. The orders are received 
by mail at a central warehouse whence the goods are shipped to con- 
sumers. The chief field for the development of mail-order sales has 
been in the rural districts and small towns. The catalogue of a 
mail-order house gives an opportunity for shopping somewhat akin 
to the visit to a department store. The large mail-order houses, to 
be sure, have utilized their buying power and their established 



286 BUSINESS ADMINISTRATION 

clientele to sell many products outside the range of shopping goods. 
Whether a mail-order house is able to operate at substantially lower 
expense than unit stores is a question that has not yet been definitely 
settled. At all events, concentration of buying power and the 
tendency to cut prices frequently have caused manufacturers to hesi- 
tate to seek distribution of their products through mail-order houses. 

Co-operative stores have not been sufficiently successful in the 
United States, up to the present time, to present a substantial market- 
ing problem. A co-operative store, properly speaking, is one that is 
owned and managed by consumers. The typical co-operative store 
is organized on the Rochdale plan, whereby each member of the 
society purchases one or more shares of stock at a small amount per 
share. The number of shares that one member may hold usually is 
limited, and ordinarily each member has one vote irrespective of the 
number of shares of stock that he holds. Dividends are commonly 
paid upon the stock at the ordinary local rate of interest and the 
remainder of the earnings, aside from such as may be set aside for 
reserves or surplus, are distributed to the members annually in pro- 
portion to their purchases. This system has had a tremendous 
development in European countries, but in the United States the 
number of co-operative stores is small and many of those in existence 
have led a precarious life. During the last eighteen months [in 19 19 
and 1920], the co-operative movement has received a new impetus 
in this country through the influence of labor-union men; this may 
prove to be a new marketing factor of large significance. 

Retail public markets present problems of quite a different 
character from those encountered in other types of retail stores. 
Municipal markets in which booths are leased to dealers, to be sure, 
are not far different from other classes of retail stores. Public 
markets in which producers sell to consumers, however, bring in a 
new set of problems. 

Widespread efforts have been put forth, specially during recent 
years, in numerous localities to stimulate the development of public 
markets of this type. Their success depends upon the buying 
habits of the consumers and their readiness to go to those markets. 
Their success also depends upon the readiness of the farmers to 
spend the time necessary to haul their produce to market and to 
carry on its sale. 

Wagon retailers include those merchants who do not operate a 
retail store, except perhaps as an incidental adjunct to cheir business, 



THE ADMINISTRATION OF MARKET PROBLEMS 287 

but who retail merchandise from wagons that deliver the merchan- 
dise at the homes of the consumers. The milk trade is one of the 
notable examples of business that is carried on by wagon retailers. 
Suggestions, such as have been made from time to time, that a 
co-operative system should be used for milk delivery, run afoul of 
this fact, that the only place of business for the ordinary milk 
dealer is his delivery wagon. If he gives up his independent delivery 
system, he practically gives up the independence of his business. 

The ice business is another trade carried on by wagon retailers. 
In this trade the heavy loss through shrinkage tends to discourage 
duplication of routes and therefore to result in the development of 
local monopolies in the ice trade. 

The final class of retail merchants includes what I have termed 
bulk retailers. Examples of this class are coal merchants and lumber 
retailers. In these trades a merchant must necessarily carry a larger 
stock requiring a heavy investment of capital. The trade is seasonal 
and sales are usually made in bulk lots on specification. The indi- 
vidual consumer seldom visits the place of business of the retailer. 

Each of these types of retail merchants presents special problems 
in store management and also special problems from the standpoint 
of the manufacturer or producer who undertakes to determine the 
logical channels for the distribution of his product. The selection of 
the retail channels to be used, moreover, influences the producer's 
decision as to the method of wholesale distribution to be utilized. 

9. THE MAIL-ORDER BUSINESS 1 

The extent of mail sales. To perhaps the majority of people the 
mention of mail-order selling brings up the thought of enormous 
establishments, such as Sears, Roebuck and Company, Montgomery 
Ward and Company, and other strong houses doing a large business 
on a national scale. It is not strange that mail-order business now 
stands for big business in the popular mind. The success of some of 
the best known mail-order establishments has been so phenomenal 
that it has overshadowed in public thought the success of thousands 
of small houses. It is a mistake, however to think that mail-order 
selling is confined to a few great, well-known houses, or that the 
problem of mail-order competition for retail stores is one involving 
merely the activities of great corporations. There are many 

1 Adapted by permission from R. S. Butler, H. F. DeBower, and J. G. Jones, 
Marketing Methods and Salesmanship, pp. 63-66. (Alexander Hamilton Insti- 
tute, 1914.) 



288 



BUSINESS ADMINISTRATION 



thousands of prosperous houses doing business wholly or partly by 
mail. In the aggregate their business is tremendous. They are 
not spectacular in their methods, but their business is solid, steady, 
and growing, and they must be taken into consideration in any 
discussion of the problems and methods of mail-order selling. Mail- 
order selling is not centered in Chicago or New York; it is centered 
everywhere. There is scarcely a town in the country that does not 
make sales by mail. 



ORGANIZATION CHART OF A MAIL-ORDER HOUSE 1 




i j m 



Why goods are sold by mail. The causes of the development of mail- 
order marketing are many. One of them, and the greatest, is the 
growth in realization of the possibilities of advertising. Another is 
the rising standards of living, which result in a demand among 
country dwellers for many things that they cannot always buy in 
local stores. Still another cause is the great increase in the number of 
manufactured goods that crowd the shelves of retail stores. Hereto- 
fore almost any manufacturer could obtain dealer co-operation for his 



1 Taken by permission from J. B. Swinney, Merchandising, p. 322. 
ander Hamilton Institute, 191 7.) 



(Alex- 



THE ADMINISTRATION OF MARKET PROBLEMS 289 

products; nowadays the dealer is often averse to pushing new goods, 
and accordingly the manufacturer finds it necessary or expedient to 
seek his own market. His decision to do this is frequently induced, 
also, by the prospect of complicated problems likely to arise as a 
result of distribution through "regular" channels. Added to these 
causes are all the facts of strength inherent in the mail-order business. 
Mail-order selling, therefore, is partly the result of consumer demand, 
partly the result of the manufacturer's necessity, and partly the result 
of a marketing policy dictated by expediency. 

10. THE LOCAL RETAILER'S ANSWER TO MAIL-ORDER 

COMPETITION 1 

[This selection is written from the point of view of the local 
druggist but it may be widely applied. The student would do well 
to prepare lists of the advantages of (a) the mail-order house and 
(b) the local retailer in this struggle. Which agency should a manu- 
facturer use ?] 

Let us analyze this mail-order competition and discuss methods 
of meeting it. While mail-order competition is a menace to the 
retail trade, it does not succeed in taking away a great deal of business 
from the merchant who is energetic and aggressive. Mail-order 
competition should be an added incentive to work harder and to give 
customers more efficient service. While mail-order competition 
can be successfully met, it must not be underestimated. These 
concerns are competitors worthy of any merchant's best efforts. 
It takes the "cold steel" to make them give ground. 

People are induced to purchase from catalog houses through the 
influence of catalogs, special price lists, and other advertising matter 
sent to them at frequent intervals. In a word, mail-order houses 
create business. They introduce goods in such a convincing manner 
that people are made to want them. 

Prices are a strong point. They are quoted in such a manner 
that the prospective customer feels they are very low. 

Illustrations in the catalog and other advertising material are, as 
a rule, good and the descriptions are written by men who know how 
to appeal to people. 

Many are made to believe that they can purchase better goods 
and save money by ordering from the catalog house. 

1 Adapted by permission from the Northwestern Druggist (February, 1918). 



290 BUSINESS ADMINISTRATION 

The catalogs of the large houses list many items that local mer- 
chants do not carry in stock. 

And last, but not least, is the constant and persistent sales effort, 
which counts. 

The local druggist has many advantages over the catalog house: 

1. He is acquainted with his customers; people do not know, 
however, with whom they are dealing when they purchase through 
the mail-order house. 

2. The local merchant meets his customers face to face and can 
appeal to them personally; mail-order houses must put their appeal 
in cold type. 

3. The customer has an opportunity to examine before purchasing; 
the mail-order houses can only show pictures. 

4. The local druggist can make immediate delivery; he can also 
immediately make good his guaranty to refund money or exchange 
for other goods; the mail-order goods are subject to annoying delays 
and there are carriage charges to be paid; to exchange mail-order 
goods adds considerably to their cost. 

5. The local druggist knows his customers and can extend credit 
when it is advisable to do so; mail-order houses necessarily require 
cash with the order, or the goods are shipped C.O.D. 

I am firmly of the opinion that the average retailer in the average 
community can secure for himself a very large proportion of the 
business going to the mail-order houses from his town and the sur- 
rounding country by using mail-order methods, modified, of course, 
to suit local conditions, and going after the business aggressively. 

1. Make your advertising effective. The mere insertion of 
a business card in a newspaper is not advertising. Advertise per- 
sistently and endeavor to have something of interest to say. Use 
modern merchandising methods. Display your merchandise attrac- 
tively. Keep the stock orderly. Change your window displays 
frequently — and keep smiling. It is said that the large catalog 
houses find the towns, where merchants are indifferent advertisers 
not up to date in their methods, the most fruitful field. 

2. Examine your own store. Keep your stock as complete as 
possible. Examine your service critically. If these are not all they 
should be — clean house. The average retailer can meet the mail- 
order competition at every point if he only thinks hard enough and 
tries hard enough. Read your pharmacy journals. They contain 
many ideas which will prove helpful in your fight against this compe- 



THE ADMINISTRATION OF MARKET PROBLEMS 291 

tition. Be wide awake and on the lookout for new things and new 
selling ideas. 

3. Arrange to get a copy of the catalogs issued by the mail-order 
houses. Study the goods and prices. They are like open books to 
one who desires to know how they secure their business. 

4. Try to secure the co-operation of every merchant in your town, 
who all feel, more or less, the effect of this competition. Interest 
the publishers of your local papers. 

5. Whenever necessary, sell from the catalogs of your wholesalers 
and manufacturers. 

6. Fill mail orders promptly and treat the customer right — 
and always courteously. 

7. Send circulars to the farmers telling them of special offers. 

8. Offer to meet the catalog price of any article listed when the 
carriage charges are added to the price quoted. This may mean a loss 
in some cases but it is good advertising, and in most instances can be 
done at a profit. 

9. Publish advertisements comparing mail-order prices with your 
own. Call attention to the annoyances and delays caused by the 
mail-order houses in sending wrong size, underweight packages, or 
seconds. 

10. Telephone customers of special items which you think they 
may be interested in. Send out personal letters — and make them 
personal. 

11. Lastly, keep hammering away month after month. This 
will get results. 



11. SOME CHARACTERISTICS OF THE DEPARTMENT 

STORE 1 

According to the United States Census of 1910, there were 8,970 
department-store merchants and 88,059 general store dealers in this 
country. C. C. Parlin stated in 19 13 that there were 1,140 depart- 
ment stores in the country, each of whose sales averaged over $200,000 
annually, and he estimated that fully 40 per cent of the dry-goods 
and ready-to-wear goods of the country were marketed through these 
1,140 stores. 

1 Adapted by permission from P. H. Nystrom, The Economics of Retailing, 
pp. 197-206. (The Ronald Press Company, 1915.) 



292 BUSINESS ADMINISTRATION 

The characteristic things about department-store merchandis- 
ing are: 

First. — Many departments or sections under one roof. Stores are 
not usually classed as department stores unless they have at least a 
score of departments and from this number to a hundred or more. 
One of the largest is said to have over 250 sections or departments. 

Second. — Special conveniences offered to all shoppers whether 
they buy or not. Under the guise of service" the modern depart- 
ment store has come to be a sort of club house and amusement place 
for women. One ordinarily finds in these stores' rest' rooms', 'Silence 
rooms for nerve-tired shoppers, reading and writing rooms, restau- 
rants, information bureaus, post offices, telephone booths, and tele- 
graph stations for the unrestricted use of all. In some x stores lectures, 
demonstrations, musical programs, moving picture shoVs, and even 
operas and plays are given frequently. In a few cases, the department 
store has served as an employment agency for domestic help, as a 
house and estate agency, and even, recently, as a market for corpora- 
tion securities. Some department stores conduct banking depart- 
ments accepting the deposits of their customers and employees and 
paying interest on these deposits, although this form of service is now 
somewhat under a cloud because of the recent failures of large eastern 
department stores having banking departments. Hair dressing and 
manicure parlors, and children's barber shops are regular adjuncts of 
the largest stores in all cities. Play rooms for children, lost and 
found departments, and dental parlors are also common. None of 
these services have any direct connection with the sale of goods in the 
store. 

Several special forms of service in direct connection with the sale 
of goods are also common. Free delivery, sales on credit, C.O.D. 
sales, goods sent to the homes of customers on approval, guarantee 
of "money back if not satisfied" and "goods freely exchanged," 
are so common now as to merit no more than a remark. While 
many of these services are extended to their customers by specialty 
or one-line stores, none have gone farther than the big department 
stores, and none could profitably do so. 

Third. — The employment of specialists in the advertising depart- 
ment. The great volume of advertising run by the larger stores is 
intended to draw people to the store and to facilitate the sale of goods. 
It is intended to take the place of much of the expert salesmanship 



THE ADMINISTRATION OF MARKET PROBLEMS 293 

that might otherwise be necessary to effect sales. Department stores 
are the greatest users of newspaper advertising space. 

Fourth. — The main factor of department store efficiency apart 
from its buying and advertising powers, already referred to, is' its 
specialized form of organization. In this respect the modern depart- 
ment store differs as day differs from night from the old time general 
merchandise store. In the latter, there was no specialized organiza- 
tion. Clerks sold goods in all or nearly all departments, and accounts 
or records were not separately kept. For the most part, when the 
store made a profit, the owner could only guess what lines of goods 
produced it, and his guess was as likely to be wrong as right. Possibly 
department store system would be impracticable in the general 
merchandise store, but the lack of it was the weakness of the latter, 
and the presence of it the basis of the peculiar strength of the former. 

In a department store, each department or section is considered 
as a separate specialty store or shop. Its accounts are kept separate, 
and under normal conditions it must stand on its own feet; that is 
to say, it must pay its own expenses, and its prorated share of the 
general expenditure for rent, light, heat, power, insurance, office 
up-keep, and so on. In addition to this it must seek to make a net 
profit. 

Each department has its own organization for buying and selling 
goods, consisting in the former case of its manager or buyer and 
necessary assistants such as assistant, buyer, head of stock, and 
sales people. In these respects the department is exactly like a 
specialty store, but the accounting, advertising, stockroom work, 
credits and collections, handling of the cash paid out and received, 
and the delivery of the goods is done for the individual department 
by special departments organized to serve all of the merchandise 
departments in the store. The specialty store, selling one line, has 
its own accounting, advertising, credit cash and delivery departments, 
but in a department store of forty sections, for example, there is but 
one of each of these departments 10 serve all of the forty sections. 



294 



BUSINESS ADMINISTRATION 



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THE ADMINISTRATION OF MARKET PROBLEMS 295 

12. THE MANUFACTURER AND THE DEPARTMENT 

STORE 1 

[It is rather widely claimed that a manufacturer prefers to sell 
to a department store because of the greater commercial stability of 
such a store and greater certainty concerning the amount of output 
which will be taken. This selection shows that the manufacturer has 
other things to think over.] 

Right at the start of any discussion of the relations of manufac- 
turers of branded goods and the big stores, it is necessary to point 
out a very real conflict of interests. It is all very well, and very 
true, to tell the small dealer in groceries or drugs or notions that 
his interests and the manufacturers' interests coincide, because he 
can sell nationally advertised goods so much more easily and more 
cheaply. The good will inherent in the manufacturer's brand is an 
asset to the small dealer, and he can afford to cultivate it. But in 
the case of the large store, it doesn't work that way. 

To sum it up briefly, there is a real conflict between the interests 
of the manufacturer and the interests of the big store. Manufacturers' 
good will injures the big store more than it helps, because it draws 
possible purchasers away from the store brands, while the big stores' 
good will hurts the manufacturer in ways which are perfectly obvious. 

As a matter of fact, department stores do carry most advertised 
lines, but do not make any effort to sell them. In fact, the effort is 
usually the other way especially where the goods are of such a nature 
that the element of personal service enters into the sale of them. 
A woman going into a corset department and asking for a nationally 
advertised brand of corset at a dollar and a half would probably 
get exactly what she asked for. But if she asked for a five- or ten- 
dollar corset — the purchase of which usually involves fitting — the 
saleswoman would lay out a specimen of the brand called for, and 
also of the store's private brand. The brand asked for would be tried 
on first, but the private-brand corset is likely to be so comfortable 
under the skilled fingers of the fitter that the customer changes her 
mind. 

Some of the corset manufacturers have gotten around this 
difficulty by having representatives do the fitting in the store, hired 
and paid for by the manufacturer, but acting under the direction of 

1 Adapted by permission from R. W. Johnson, "The Big Store and Advertised 
Goods," in Printers' Ink (October 31, 191 2), 59-62. 



296 BUSINESS ADMINISTRATION 

the store as extra saleswomen. In some cases this practice has 
gotten almost to the point where the manufacturers are hiring all 
the help in the store corset department, and they point to this as 
another phase of the department-store problem. A demonstrator 
for a month or so is all right, they say, but when it comes to hiring 
permanent saleswomen for somebody else it ceases to be a joke. 

A great many manufacturers would be interested in hearing from 
some of the stores on this subject. It is a subject upon which the 
manufacturers themselves do not care to speak out, because they do 
not want to risk offending some of their largest customers. Investi- 
gations among the large stores show that from 60 to 80 per cent of 
them express themselves as "friendly to" or "in favor of" nationally 
advertised goods. The manufacturers do not deny that. They say 
that the stores are friendly enough, and most of them are willing to 
carry a small stock of the goods, but they don't seem anxious to hand 
them out unless they are demanded. 

Can anybody suggest a scheme whereby the manufacturer and 
the big store can line up their interests together, instead of playing 
at cross-purposes? 

13. THE ORIGINS OF THE CHAIN STORE 1 

Chain-store systems may be classified according to ownership 
as follows: Retailers' chains, jobbers' chains, manufacturers' chains. 

Retailers' chains have in many cases been formed simply by 
gradual expansion, the owner beginning with one store and adding 
others as circumstances permitted. Many retailers have been so 
successful with their first store that they have established branches, 
sometimes conducted in co-operation with the parent store and 
sometimes independently. In a few noteworthy instances retailers' 
chains have been formed by the establishment of a corporation with 
the purpose of acquiring and conducting a number of retail stores 
under a definite chain-store plan of organization. In still other 
cases chains have been formed by the union of several retailers into 
an organization, usually of corporate form, each retailer taking stock 
in the company, and in return permitting his store to pass into the 
new organization. Some of these retailers' co-operative chains have 
enormous memberships. 

The object in view in the organization of retailers' chain-store 
systems has been largely to reap the profits of increased buying 

1 Adapted by permission from P. H. Nystrom, The Economics of Retailing, 
pp. 216-223. (The Ronald Press Company, 1915.) 



THE ADMINISTRATION OF MARKET PROBLEMS 297 

power, of heightened efficiency in advertising, in better handling of 
credits and collecting, and in more profitable methods in handling and 
selling merchandise. For many merchants who have acquired or 
established branch stores, the additional store units have served as 
a means of investment for surplus funds and as a field for the exercise 
of exclusive ability not fully taken up in the single institution. 

Some of the chain-store systems carry on their jobbing functions 
much the same as an ordinary jobbing house. 

Jobbers' chains have come into existence in various ways. In 
some cases, jobbers have been forced to buy out retail stores from 
certain of their retail debtors to save themselves from loss such as 
would occur if the store were to go on in the hands of the former 
owners and managers. A good many jobbing houses have a number 
of retail stores that they virtually own and which they are nursing 
along in the hope of building up the business or until a competent 
manager can be found who will buy the store. Management of 
these stores calls for the same methods and practices as are required 
in other chain systems. In some cases when breaking into new 
territory, jobbers are forced to acquire stores of their own in order to 
find local outlets for their goods. Stores already in such localities 
may not willingly take on new lines, and a jobbers' own store system 
may be the only means of reaching the consumer. 

In still other cases, the jobber may find his trade slipping from 
him either because of cut-throat competition with other jobbers, 
or because manufacturers are selling directly to retailers. In the 
ordinary course of events either of these processes might eliminate 
the jobber. To save himself and to insure a constant market, his 
only recourse may be to establish a chain of retail stores to handle 
his goods. This adaptation of the jobber to new conditions is going 
still farther in a few instances. Not only are chains of stores acquired 
but also manufacturing plants, so as to assure both a market and a 
product to place on the market. Jobbers thus have become both 
retailers and manufacturers, as well as wholesalers. It seems likely 
that this integration of distributive processes is likely to go on in 
several lines, those, particularly, in which the jobbing functions are 
diminishing in importance. 

There are a number of manufacturers' chain-store systems, nearly 
all of which had their origin in an inability to find a satisfactory 
market through the regular channels of trade. Among the lines of 
goods represented in manufacturers chains, one finds several brands 
of shoes, confectionery, baked goods, hats, gasoline, and kerosene, 



298 



BUSINESS ADMINISTRATION 



sewing machines, cash registers, adding machines, typewriters, office 
furniture, automobile supplies, corsets, gloves, sporting goods, 
phonographs, paper novelties, etc. Some of these goods probably 
could not be marketed through regular retail stores. Others are 
not so marketed because of dissatisfaction due to any one of several 
causes, such as competition with other goods on dealers' shelves; 
price-cutting among dealers on the manufacturer's standardized lines; 
inability of the average retailer and retail salesman to give intelligent 
salesmanship to the line; unwillingness of the average retailer to 
put in a complete line such as the manufacturer considers necessary 
to give the consumer a fair idea of his goods; and unwillingness or 
inability of the average retailer to give the additional service sometimes 
found necessary to make sales stick. 



ORGANIZATION CHART OF THE LIGGETT-RIKER-HEGEMAN 

DRUG STORES 1 

THE PRESIDENT & GENERAL MANAGER 



OFFICE ORGANIZATION 



VICE-PRESIDENT 

I 
& 



FINANCE AUDITING 



3- 



CONSTRUCTION 



EXPENSE CONTROL ETHICAL STOCK 
CONTROL OF SUPERVISION TURN- 
CENTRAL OVER 
WAREHOUSES 



EMPLOYMENT DEPT. 



VICE- 
PRESIDENT 



MANAGER 

SUPPLY 

DEPARTMENT 



SELECTION OF CONTROL 
NEW LOCATIONS OF 

AND PURCHASING 

MANAGEMENT 

OF 
REAL ESTATE 



FIELD ORGANIZATION 



TERRITORY 
MANAGERS 



DEPARTMENT 

I 

MANAGERS 



MERCHANDISING ADVERTISING 

I I 

DEPARTMENT DEPARTMENT 



SELECTION OF 

NEW MERCHANDISE, 

PUNNING 

SPECIAL SALES 
PRICE REGULATION 



GENERAL VOLUME OF BUSINESS 
SERVICE 



SPECIALIZATION IN 
DEPARTMENTS 



Compare this diagram with the one showing a possible organization of a 
mail-order house (p. 288). Are there fundamental differences? Does this dia- 
gram fit in with the one on page 15 ? 



There is another type of chain-store organization that might 
properly be discussed under this heading. This is the consumers' 
co-operative chains. Such concerns have not as yet made much 
progress in this country, but in Europe they are numerous and, 
according to most reports, very successful. 

1 Taken by permission from J. B. Swinney, Merchandising, p. 305. (Alex- 
ander Hamilton Institute, 191 7.) 



THE ADMINISTRATION OF MARKET PROBLEMS 299 

14. MARKET STRUCTURES BY CLASSES OF 
COMMODITIES 1 

[We are so prone to seek the one " right" way to do things in this 
world that this selection which points out that market structures 
are likely to vary with varying conditions will help us to keep a 
sense of perspective in the marketing field.] 

One class of merchandise which seems to have common charac- 
teristics is raw material, or, more strictly, material whose disap- 
pearance from commerce takes the form of sale to a manufacturer 
for change into some other form of goods. (Class A.) 

A second class of merchandise, which has some points in common 
with this, but enough points of difference to justify separate classi- 
fication, is found in the case of such materials as still remain in 
existence and use as part of productive equipment after they disap- 
pear from commerce. (Class B.) 

The class of merchandise which offers the most complicated 
marketing problems, however, is that type of goods which disappears 
from commerce to go into individual consumption, or into household 
use. (Class C.) 

Class A — Having recognized such a classification of merchandise, it 
becomes necessary to examine the pro vailing types of marketing 
functions in various industries and trades to determine their general 
nature and contrasting features in the light of this classification. A 
marketing transaction in the case of merchandise sold to be remanu- 
factured is ordinarily conducted on a relatively large scale. More- 
over, it is necessarily only one of a number of kindred transactions 
by which the supply of material is kept up. For example, if a blast 
furnace company buys iron ore, it presumably will buy it in quan- 
tities which under modern blast furnace practice will be relatively 
large, and it is also a safe assumption that it will buy iron ore more 
or less continuously as long as the blast furnace remains in operation. 
The large scale and the continuity of this sort of transaction is a 
common characteristic of purchase of merchandise for manufacture 
or remanufacture. The most common device to be found in this 
field of marketing is the contract (frequently of a renewable charac- 
ter) which has practically all of the terms and conditions standard- 
ized, leaving only the price and the conditions of delivery to be 
determined. In the case of mineral products not yet mined, it is not 

* Adapted by permission from P. T. Cherington, The Elements of Marketing, 
pp. 20-55. (The Macmillan Company, 1920.) 



300 BUSINESS ADMINISTRATION 

uncommon for this type of contract to take the form of an agreement 
on a lease and royalty basis under which frequently the purchaser 
of the ore becomes either virtually or actually the operator of the 
mine. In this class of marketing transaction, the relation between 
the producer and consumer is intimate as well as continuous, and the 
connections thus formed may become an important part of the 
resources of the concern doing the purchasing. The ore contracts of 
the United States Steel Corporation are a case in point. If one were 
seeking for the underlying cause of a substantial part of the move- 
ment toward the integration or common ownership of successive 
steps in manufacturing industries in this country in recent years, he 
could find it in many cases in some of these typical contract relations. 

The inherent properties of the commodities sold determine in a 
large measure the nature of the mechanism set up for permitting the 
influences of supply and demand to have free play. For example, 
the physical properties of wheat make it particularly favorable for 
handling through a highly organized system of storage and trading, 
which results in the entire supply being virtually in sight at all times, 
and which also causes most of the transactions taking place in it to 
be conducted on contract. Cotton, on the other hand, because of 
the lack of ease, from a physical point of view, with which it may be 
put into storage and taken from it, has developed an entirely differ- 
ent group of relations between the speculative trading, and spot 
trading. Similarly, such commodities as tobacco, sugar beets, and, 
to a certain extent, wool are incapable of accurate grading for future 
contract trading on a basis similar to that employed in the case of 
either wheat or cotton. They are, therefore, more often bought in 
either specific lots or by type. Cotton yarn furnishes an example of 
another commodity for manufacture which is bought and sold on 
conformity to type rather than either by the sort of contract prevail- 
ing in the sale of wheat and cotton or even by specific lots. Coal and 
iron ore, on the other hand, when bought at the mine, or more 
specifically in the mine, call for an entirely different method of recon- 
ciling the inequalities between production and consumption. The 
typical form of sale in the case of these is by the lease and royalty 
contract. 

The characteristic features of the commercial mechanism for 
conducting such transactions in merchandise of Class A are com- 
paratively simple. They are in most cases devices whose underlying 
task it is to guarantee as far as possible the free play of the price- 



THE ADMINISTRATION OF MARKET PROBLEMS 30 1 

making influences of supply and demand. A mere listing of the type 
of marketing device commonly employed in this type of sale serves to 
make clear the comparative simplicity of this underlying task. Some 
of the more conspicuous devices are as follows: 

1. Brokers 

2. Commission houses 

3. Merchants 

4. Elevators, warehouses, and other storage equipment 

5. Bankers 

6. Underwriters 

7. Auctions 

8. Future trading facilities 

9. Lease and royalty contracts 

Class B — There is a very different general kind of marketing 
transaction in the sale of merchandise for the equipment of various 
enterprises both large and small. In the case of the larger types, 
such as the sale of railroad material and equipment, many kinds of 
machinery, and other kindred commodities, the transactions are on 
such a large scale as to affect materially relations of a financial nature 
between buyer and seller. A common solution in the case of market- 
ing enterprises of this kind, as well as in the case of many articles 
for remanufacture, is the use of a contract by means of which all 
adjustments of the problems of quantity, quality, time, and place 
are stipulated in the agreement. This form of sale and the resulting 
relations between the buyer and the seller, based as they are upon 
a divergence between the nature of the business of one party to the 
transaction and that of the other, has caused frequently the setting 
up of what are known as " interlocking directorates" as distinct 
from the actual integration of ownership of both the buying and 
selling concerns. In this way a continuance of friendly relations is 
assured while organic separation is maintained. 

Aside from the large volume of direct sale for merchandise of 
this class, there is a substantial volume of business conducted through 
a commercial mechanism. Jobbing contractors, such as are to be 
found in the sale of many lines of railway equipment, both steam and 
electric, are perhaps on a dividing line between direct sale and sale 
through mechanism. Supply houses, such as exist in many parts of 
the electric trade, or in the trades of building materials, and more 
completely standardized forms of machinery are clearly middlemen 
and therefore of the nature of a commercial device. In the case of 



302 BUSINESS ADMINISTRATION 

the manufacturers of equipment highly protected by patents, and 
particularly when the equipment calls for expert knowledge for 
keeping it up and special facilities for repairs, the providing of spare 
parts, and of supplies, the tendency has been to set up special selling 
organizations which are either actually or nominally operated inde- 
pendently of the actual producing process. Cases in point are the 
Western Electric Company, engaged in the distribution of telephone 
equipment, the sales departments of certain of the typewriter com- 
panies, and the distributing organization of various makers of ma- 
chinery, such as printing or textile machinery. 

Class C — Marketing of the remaining and most conspicuous 
class covers merchandise for individual or household use, and there- 
fore includes the greater part of business terminating in a retail sale. 
In this class of marketing, in addition to the elementary problems 
common to both of the other classes, the process of distribution 
necessarily involves a large amount of emphasis on what have been 
referred to as the sales functions. The most conspicuous feature of 
the sales undertakings of this type is the comparatively small size 
of the sales unit in which the merchandise is disposed of in the final 
transaction. If there is a series of wholesale dealings leading up to 
this final transaction, each of these in a large measure takes its 
character from the fact that eventually the goods are to be offered 
to the consuming public in finely divided units. For merchandise 
of this kind there is inevitably some point in the course of the progress 
of the goods from producer to consumer up to which it is desirable 
to handle the goods in large quantities and beyond which it becomes 
advisable constantly to decrease the quantities in which the mer- 
chandise is moved through succeeding marketing steps. In the case 
of this class of merchandise another factor of great importance is the 
individual nature of the final sale. In such a sale there is an element 
of special selection or choice; hence, the physical conditions under 
which the sale is made become a conspicuous feature of this final 
transaction. 

It is in this class that there are to be found most of the generally 
discussed efforts to change the organization of the distributing 
mechanism. Suffice it to say here that with the elaboration of activi- 
ties in this class the devices for effecting distribution have become 
heavily incrusted with features which, while not economically justi- 
fiable for all types of customers, have real value to some of them. 



THE ADMINISTRATION OF MARKET PROBLEMS 303 

It is only in very recent years that the efforts to free the distributing 
system in this class of some of its costly superfluities has taken really 
constructive form. The blind efforts to " eliminate" some "middle- 
man" seldom have yielded the good results hoped for. The better 
selection and adaptation of the supplementary services rendered to 
the needs of various types of customers have accomplished real 
savings. New forms of mechanism are emerging. The old types of 
organization are being materially modified. The old terms "whole- 
saler" and "retailer" now find themselves qualified and subdivided; 
and the changes in the main, reflect a closer adaptation of forms of 
functionary to functions performed. 

15. THE MIDDLEMAN IN DISTRIBUTION 1 

The middleman is a by-product of a complex industrial organiza- 
tion. Chart I shows in rough outline the evolution of the middleman 
from the early period, when producer dealt directly with consumer, 
to the appearance of the orthodox type of distribution (late in the 
eighteenth century and in the first quarter of the nineteenth century), 
when a complicated series of middlemen existed. It should be 
noted that this chart represents the typical case of the domestic" 
product rather than that of imported commodities. 

Just as the long period of development from a system of barter 
economy to the early decades of the factory system showed a con- 
tinuous tendency for increase in the number of middlemen inter- 
vening between the producer and the consumer, so recent years have 
shown a growing tendency to decrease the number of successive 
steps in distribution. The tendency is apparent in nearly every 
industry and has been clearly marked in recent years. 

Under the orthodox type of distribution, with numerous middle- 
men intervening between the producer and the consumer, the pro- 
ducer is in a position of disadvantage. The fixed charges under 
which he operates render it necessary that he operate continuously. 
The outlet for his goods, however, is controlled by the middlemen. 
Hence the middleman is able to exert pressure upon the producer 
and force a narrowing of his margin of profit. To free themselves 
from this pressure, the stronger merchant-producers seek to go 
around the immediate middlemen, thus decreasing the number of 
steps in the system of distribution. 

1 Adapted by permission from A. W. Shaw, "Some Problems in Market Dis- 
tribution," in the Quarterly Journal of Economics, XXVI (191 2), 725-31. Later 
published in An Approach to Business Problems (A. W. Shaw Company, 1916). 



3°* 



BUSINESS ADMINISTRATION 



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THE ADMINISTRATION OF MARKET PROBLEMS 



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306 BUSINESS ADMINISTRATION 

Chart II is an attempt to show diagrammatically the development 
of this tendency to decrease the number of successive middlemen. 
By the use of salesmen going directly to the wholesaler and by adver- 
tising directed to the retailer the producer has displaced the selling 
agent in many cases. Sometimes the advertising is directed not 
only to the retailers but also to the wholesalers. To strengthen still 
farther his position the producer will often use advertising directed 
to the consumer to build up a demand for his product. This involves 
the necessity for a product differentiated by trade mark, brand, 
or trade name. When the producer thus directly builds up a demand 
among consumers, he often takes the further step of sending his 
salesmen to the retailer, thus omitting the wholesaler entirely from 
his system of distribution. 

The most extreme step in the process is the complete elimination 
of middlemen, and the sale direct from the merchant-producer to the 
consumer, either by advertising alone or by salesmen supplemented 
by advertising. Manufacturers of specialties have largely adopted 
this scheme of distribution and the enormous growth of the mail- 
order business in recent years gives evidence that in some lines of 
distribution there are economies in this system. 

16. THE BREAK UP OF THE ORTHODOX SYSTEM OF 

DISTRIBUTION 1 

[The so-called "chaos" in modern distribution is well illustrated 
by this selection. It shows how " the second phase of the industrial 
revolution" is a "commercial revolution" in which the battle cry 
seems to be "Keep a grip on the consumer."] 

What is the trouble ? 

Ask this question of the manufacturer, the jobber, and the retailer 
successively and you ascertain that the "other fellow is to blame." 

"If," says the manufacturer, "Jones, the jobber, hadn't put 
out his private brand in competition with mine, I wouldn't have 
had any fault to find. He's pushing his own goods and at the same 
time handling mine. He won't let me know where my own goods 
are for sale, for fear I'll go over his head to the retailers. Conse- 
quently, between inability to stimulate and help my dealers, and the 

1 Adapted by permission from P. T. Cherington, Advertising as a Business 
Force, pp. 30-35, 157-204. (Doubleday, Page and Company, 1913. Copyright 
by Associated Advertising Clubs of America.) 



THE ADMINISTRATION OF MARKET PROBLEMS 307 

jobber naturally pushing his own brand in preference, I'm up a tree, 
and I'll go direct to the retailer, if he doesn't come to time." 

"If," says the jobber, " Martin, the manufacturer, hadn't cut 
me out and gone over my head direct to the retailer, I wouldn't have 
put out my private brand." 

"If," says the retailer, " Jones, the jobber, hadn't gone also into 
the retailing business, I'd not have accepted the direct prices of the 
manufacturer and wouldn't have gone into the field of wholesaling, 
too." 

The jobber, the manufacturer, and the retailer are interchanging 
functions. Park & Tilford are retailers, with a chain of stores, as 
well as jobbers. Francis H. Leggett & Co., of New York, are becom- 
ing advertising manufacturers of Premier products, as well as jobbers. 
Here are two jobbers reaching both ways, causing dissatisfaction 
to the manufacturer and the retailer alike. 

The manufacturer, in order to have a finger in the messing up of 
the situation, has been known, not only to go over the jobber to the 
retailer, but also to jump at once to the consumer. An example is 
Browning, King & Co., clothing manufacturers and retailers, in 
fifteen cities. 

Of course, the retailer couldn't stand all of this meekly. So we 
see in the James Butler string of grocery stores a retailer who demands 
jobbers' prices of the manufacturer and who is even doing some of 
his own manufacturing. Marshall Field & Co., of Chicago, do a 
large jobbing business. Wanamaker's, of New York, has just organ- 
ized a wholesale department. All these were at first retailers. 

If James Butler can buy groceries direct from the manufacturer 
at jobber's discounts, how can the little retailer on the corner, who 
is strictly minding his own business as retailer, possibly compete? 
Butler can sell, his goods at prices that are "cost" to the little fellow. 
And the little fellow must live. He, therefore, is doing his part in 
stirring up the dust, and by association with other little fellows, 
putting himself on even buying terms with Butler. Those depart- 
ment stores that get jobbers' discounts are also regarded as just as full 
of threat to the retailers' business. 

For their part such enterprises as those of Butler grit their teeth, 
and mutter something about "competition of jobbers" and "survival 
of the fittest." Indeed, the department stores, Butler, et al., insist 
that they must have the jobbers' discount or they can't do business 
in competition with the retailing jobber. Macy's, or Saks's, or 



308 BUSINESS ADMINISTRATION 

Marshall Field's, or the May department stores seem to have some 
justification in their explanation in view of the invasion of the retail 
field by the powerful H. B. Claflin interests. 

The whole mix-up has been caused by the attempt of some manu- 
facturer or wholesaler to cut out one or more steps in the old-time 
distributive process, which was from manufacturer to jobber, to 
retailer, to consumer. The consumer holds the key — he will buy 
where he can get the best goods cheapest. While this tendency is one 
of the most natural in the world, it has developed strife and ill-feeling 
to a remarkable degree. Caught in the swirl of changing trade cur- 
rents, every factor concerned has at times turned upon another, 
accusing it of being at the bottom of the whole trouble. 

C. Sales Management for a Manufacturing Business 

Now that we have at least a working hypothesis of what the 
marketing functions are and have seen something of the institutional 
life which can be used in the marketing process, let us examine in 
broad outline the control problem of the sales manager of a manu- 
facturing business. Since we are more interested in similarities than 
in differences of marketing problems, it will facilitate our study if we 
do not designate what kind of a manufacturing business it is, beyond 
saying that it makes some commodity for individual, and not factory, 
consumption. We make this specification because the study we made 
of market structures dealt mainly with those concerned with the 
marketing of such commodities. 

The problem may be put before us thus: a sales manager is 
considering how (and whether) to increase his sales in a certain 
territory which he is already " covering." What are the materials 
for the solution of this problem ? 

It must be admitted that the materials are none too abundant. 
We do not know as much about marketing as we do about the pro- 
duction activities of business. The reason is simple and plain. We 
have behind us more than one hundred years of study of production 
problems during a time when the market was ever yawning for more 
output. This study, too, was on a reasonably firm foundation of 
science, for the physical sciences which are applied in technology got 
their start on a modern basis as early as the seventeenth century. 
Marketing problems, in the contrary, have become, pressing only in 
the last generation or two and the basic sciences of psychology and 
economics are even yet not well developed. 



THE ADMINISTRATION OF MARKET PROBLEMS 309 

This does not mean, however, that our sales manager is limited 
to pure trial-and-error experimentation or, worse still, that he is 
committed to stagnation. A beginning has at least been made in 
blocking out the main aspects of the problem. One such attempt is 
sketched on page 6 of this book and is explained at length in Shaw, 
An Approach to Business Problems. To Shaw, the work of the sales 
manager may be summed up in two expressions, (1) demand creation 
and (2) physical supply of the goods. The manager's activities are 
all in terms of those goals. This formulation is at least definite and 
tangible. Another formulation, that of Professor Copeland, is given 
in Selection 17 below. 

And we are able to go farther than merely making a sketch of 
the outlines of the problem. Certain helps, some of them empirical 
rather than scientific, it is true, are available in the actual conduct 
of operations. There are certain " check lists" of forms or methods 
of analysis of the product, the market, and channels of distribution, 
such as the sample shown in Selection 18, and such as the more 
extended statements of market analysis and commodity analysis 
given in Selections 19 and 20. 

Furthermore, certain helps in actual control of operations have 
become fairly well standardized. We shall notice particularly certain 
measuring aids of market administration. Some specimens of a rather 
voluminous literature in this field are given in Selections 21 to 26, 
inclusive. They give hints of the uses which can be made of account- 
ing, statistics, and other measuring devices as instruments of control. 

Of course, sales management is not all technique and routine 
administration. Policies must be formed; an organization must be 
worked out. As samples (they are only samples) of the activities 
in these two fields we shall look at certain price policies in Selections 
2 7 - 335 an d at certain questions of appropriate organization of the 
sales department in Selection 34. 

PROBLEMS 

1. Consult the chart on page 6 and Selection 17 (p. 313). Draw up your 
own list of the chief phases of the problem of the sales manager. 

2. Compare the medieval market with the modern one in respect to the 
necessity for analyzing the market. 

3. "Let us remember that most dealers are still largely without recognized 
standards of merchandising competition." Why? Put definite mean- 
ing into "standards of merchandising competition." 



310 BUSINESS ADMINISTRATION 

4. What are staples, specialties, branded staples, utility goods, style 
goods, shopping lines, convenience goods? What value attaches to 
such classifications? Some writers further ask whether goods must 
be sold by bulk, sample, or description, whether buyer seeks the 
seller, or conversely; whether he may expect repeated sales to a 
consumer, or not. What value attaches to such considerations ? 

5. Indicate what use a sales manager could make of data showing the 
per capita wealth of a district, the per capita incomes, per capita con- 
sumption, ownership of homes, mortgage indebtedness, standards of 
living, direction of expenditures (EngePs Law), climatic conditions, 
geography of the district, predominant industrial activity, nationality 
of residents. 

6. Look through Selection 18 with the aim of answering these questions 
(a) Wherein is there evidence that the tasks of the sales manager are 
interrelated with those of other functionaries ? Let your evidence be 
specific. Cite the other functionary in every case; (b) Cite cases where 
a psychologist might conduct experiments which would throw light on 
the problem of the hypothetical sales manager we are dealing with in 
this section of our work; (c) Cite cases where an economist might 
help; (d) Cite cases where a "distribution census" carried out by the 
government might contribute data. 

7. Give the reasons for listing the following factors as an essential pre- 
liminary to a study of national distribution: (a) The territorial varia- 
tions in consumption ; (b) The classes of dealers now handling a similar 
article; (c) The classes of trade sold by these dealers; (d) The sales and 
advertising policies and plans of competitors; (e) The volume of busi- 
ness secured at the present time by various competitors, with regard 
especially to the kind, quality, finish, and price of the product each is 
marketing; (/) The percentage of repeat sales competitors seem to be 
able to secure. 

8. Shaw cites four significant matters relating to control of salesmen: (1) 
hiring; (2) training; (3) paying; (4) directing. Give at least one 
modern method connected with each. 

9. Compare in regard to the following points the training of salesmen and 
shop-workers: (a) The importance of training; (b) The ability to 
standardize instruction for each group; (c) The methods employed. 

10. In rating salesmen, what importance should be assigned to the volume 
of sales, profits from sales, expenses incurred by salesmen, and mail 
orders obtained along the salesmen's route? What is the object of 
house organs and sales conventions ? What is a sales quota ? 

11. Distinguish between general and direct advertising. 

12. What are the essential prerequisites to a widespread use of sale by 
description ? 



THE ADMINISTRATION OF MARKET PROBLEMS 311 

13. "Advertising can be spread broadcast as a drag-net, while salesmanship 
must be reserved for specially remunerative territory." Why or why 
not? 

14. "Some of the greatest failures of advertising goods have been due to 
the mistaken notion that one can make advertising pay from the start 
by tacking the cost of the advertising on to the prices." Explain. 

15. "The current tendency in marketing goods through advertising is to 
emphasize not price but the differentiation from staple types and the 
closer adaptation to the user's needs." Comment. 

16. Explain how the keying of advertisements is an instrument of control 
in the hands of the business manager. 

17. Why should the business manager act as carefully when he selects the 
kind of materials to be used in demand creation as when he determines 
the various elements entering into the manufacture of his product? 
Can he be as careful ? 

18. How would you go about establishing standards for materials of demand 
creation comparable with laboratory standards common in production ? 
Why try at all ? 

19. Can laboratory methods be applied to the selection of advertising 
mediums and material ? Illustrate. 

20. What is sales planning? What objects does it serve? What would 
you include in a sales plan ? 

21. Can you say why the writer in connection with analyzing his product 
asks "what per cent of increase in the total demand will the capital 
accommodate " ? 

22. Under what circumstances is it wise to have your own selling organiza- 
tion ? When is it unwise ? 

23. "No manufacturer, however efficient and honorable the middlemen 
handling his product are, can afford to be without first-hand knowledge 
of his market." Why not ? What does such first-hand knowledge of 
the market include ? 

24. What considerations determine whether a man shall (1) sell at the 
market minus; (2) sell at the market par; and (3) sell at the market 
plus? 

25. Why should a manufacturer in disposing of unbranded commodities 
under the orthodox system of distribution turn his energies toward 
reducing costs of production and the price rather than to particular 
likes of the consumer? 

26. Why is it that many business houses adopt the plan of putting out 
products in two grades, but retaining to as great an extent as possible 
the same essential utility or style ? 

27. What difference, if any, is there between selling under the market and 
' holding a clearing sale ? 



312 BUSINESS ADMINISTRATION 

28. "The bulk of non-trade-marked specialties and of goods which carry 
dealer's brands are distributed below the normal market price." Why 
these particularly ? How is the middleman remunerated ? 

29. What is meant by the expression "one-price-policy"? What are its 
advantages ? 

30. "The price-maintenance policy originated with the present system of 
distributing goods through wholesalers and retailers. Large scale, 
specialized production, dependent upon wide distribution through the 
regular channels of trade, and cut-throat competition are the conditions 
out of which grew the demand for this policy." Explain. 

31. A person in monopoly control of his market will tend to set his price 
so as to make the largest net profit. This is sometimes called the 
law of monopoly price. Suppose a firm has just acquired monopoly 
control and is now to establish its price policy. Can you tell whether 
it is likely to sell at the market, or at the market plus, or at the market 
minus ? 

32. Under what circumstances would a price policy designed to keep "under 
the umbrella" of a trust be expedient ? 

33. At one time there was a rumor that the Ford Motor Car Co. would sell 
its products for $333 by discontinuing the Ford Agencies and selling 
by mail. What elements of distribution would make it possible? 
What elements would work against it ? 

34. The Curtis Publishing Co. reports a man who was doing a satisfactory 
business with two competitors in the field. After he had bought out 
these firms his business became less successful. How can you account 
for such a situation? 

35. An engraving company, with a local market, found on investigation 
that it was doing about 80 per cent of the business of the market with 
three competitors to handle the remaining 20 per cent. How coidd 
the company increase its business? Make specific suggestions. 

36. "The same concern may use different channels of distribution in 
different markets." How can this be? 

37. Why is it that the business man only infrequently realizes how intricate 
is the problem of determining the agency or the combination of agencies 
which is exactly adapted to reach the various geographic, or social and 
economic state of his market ? 

38. Why should a business maintain a bureau for commercial research? 
What tasks should such a bureau undertake? What agencies are 
available today for the performance of such work ? 

39. What arguments are there for having the advertising manager subordi- 
nate to the sales manager ? For having him independent of the sales 
manager ? 

40. Draw up an argument in favor of the position that the sales manager 
should have a general knowledge of the other functions of the business, 
such as finance, technology, personnel control, etc. 



THE ADMINISTRATION OF MARKET PROBLEMS 313 

41. Some people believe that the sales manager should formulate his 
policies in a committee made up of himself, the works manager, the 
personnel manager, and some financial functionary. What arguments 
do you see in favor of this position ? Against it ? 

42. Should credits and collections be administered under the sales manager ? 

17. A BRIEF STATEMENT OF THE MARKETING PROBLEMS 
OF THE MANUFACTURER 1 

What is the proper relation of the sales department to the other 
departments of a business ? What is the relation of the sales depart- 
ment to the production department? How are the sales policies 
and the credit policies of a business to be harmonized ? 

What are the selling points of a product? This is a marketing 
subject worthy of especial attention, for it involves that recognition 
of the point of view of the buyer which is so essential in all effective 
saleswork. 

The determination of brand and trade-mark policies is another 
subject of general significance. Shall the manufacturer sell his 
product branded or unbranded ? If it is to be sold as a branded prod- 
uct, shall he sell it under his own brand or under the brands of whole- 
salers or retailers? There is a series of interesting questions to be 
taken up in this connection. The selection of a trademark ties in 
directly with these questions. 

How is the market for the product to be analyzed ? A manufac- 
turer cannot safely assume that his product will appeal alike to all 
classes of consumers. Differences in living conditions, in occupa- 
tions, in habits and customs, and many other factors, as well as 
general business conditions, determine the class or classes of con- 
sumers from whom he may expect the demand for his product to 
arise. He needs to know where the potential consumers are located 
and what volume of sales may be counted upon. The more definitely 
he can determine the potential market, the more readily can he solve 
many of his other marketing problems. 

The management of the sales force brings up another series of 
problems. How is the sales force to be selected and trained ? What 
method of paying the sales force is to be adopted? How are the 
activities of the salesmen to be followed and checked ? A study of 
the practice of typical manufacturers in dealing with such problems 

1 Adapted by permission from M. T. Copeland, "Scope and Content of a 
Course in Marketing," in Journal of Political Economy, XXVIII (1920), 396-97. 



3M BUSINESS ADMINISTRATION 

is obviously essential (see chapter iii, "The Administration of 
Personnel"). 

In the marketing plans of a manufacturer, advertising ordinarily 
should have a definite place. There are some services in the market- 
ing of a product which commonly can be performed more effectively 
by advertising than by the sales force. The advertising campaign 
therefore should be planned properly with reference to the specific 
work it is desired that it should perform in relation to the other sales 
work of the company. Suppose that a company is organized to 
manufacture a new food product. The company is starting out on a 
small scale with the expectation that eventually it will distribute its 
product to all parts of the United States. The product is to be sold 
through the orthodox wholesale and retail channels. What adver- 
tising should be used to reach wholesalers, retailers, and consumers ? 
Should the advertising precede or follow the initial work of the sales 
force? How long should it be continued? What mediums should 
be used? What message is it desired that the advertising should 
convey? In what sequence are the selling points to be presented? 
Such questions as these must be taken into account in planning an 
advertising campaign from the standpoint of the business as a whole. 

Other sales policies, such as the use of the guaranty, methods of 
handling cancellations, and returned goods, must be considered. 

Finally, questions of price policy are to be taken up. The factors 
that must be considered in determining discounts, in fixing the prices 
to be charged to various classes of customers, and in supervision of 
the execution of these price plans are often perplexing to the execu- 
tive who must solve them. 

18. ANALYSIS OF PRODUCT, MARKET, AND CHANNELS 

OF DISTRIBUTION 1 

[This is presented as a sort of check list of the analysis which can 
be made of marketing problems. The student should work through 
it slowly, keeping constantly in mind these questions: (i) Does the 
sales manager need to know about this item ? (2) How can he find out 
about it? (3) Precisely what is meant by saying that marketing 
problems are inter-dependent with all other business problems ?] 

1 Adapted by permission from Mac Martin Advertising Agency, Inc., Minne- 
apolis, Advertising Campaigns, pp. 1-3. (The Alexander Hamilton Institute, 192 1.) 



THE ADMINISTRATION OF MARKET PROBLEMS 315 

Part I. Analysis of the Product to Be Advertised 

A. Demand 

1. Developed, undeveloped, or overdeveloped 

2. Necessity or luxury 

3. Staple or novelty. 

4. Article may be a "repeater" 

Profit in most business is in the re-orders 
Must gain the confidence of customer 
Investigate the article to find per cent of repeat 

5. A " year-round seller" or seasonable 

6. Present total annual consumption of the article 

B. Supply 

1 . Present total capacity of plant 

2. Raw material 

3. Labor 

4. Management 

5. Capital 

a) What per cent of increase in the present demand will 

the capital accommodate 

b) How much of an investment in "good- will" will the 

present capital accommodate 

c) How much can be spent before results are secured 
How much could be spent if necessary 

C. Quality 

1. Can it bp improved upon in 

a) Materials or workmanship 

b) Through sight, touch, taste, hearing, or smell 

c) Substance, size, or shape 

2. The name 

a) One or more names 

b) Can the name be protected as a trade-mark 

c) Certain names are held by the courts to be unpracticable 

d) The name should be distinctive 

e) It should relate to the product, its uses, or associations 

in sound or in meaning: 

"Sunshine" for biscuits 

"Gold Dust" of a golden-colored washing powder 

"Ivory" for soap of that color 
/) It should be easy to pronounce 
g) It should be short 

B.V.D. vs. Hart, Schaffner and Marx 



316 BUSINESS ADMINISTRATION 

3. The container, cover or package 

a) Should be distinctive 

b) Convenient for all of the purposes to which it may be 

put 

c) Related to the name or to the article, to its uses or 

claims in color, shape or in style of type 
D. Prices 

1. Quantity discounts to dealers 

2. Discounts to consumers 

3. Price competition with (a) Jobbers (b) Retailers (c) Con- 

sumers 
Profits 

1. Comparison of profits with (a) Manufacturer (b) Jobber 

(c) Retailer 

Part II. Analysis of the Market 

A. Geographical 

1. Is the field (a) International (b) National (c) Territorial 

(d) Local 

2. Is the field (a) City (b) Town (c) Rural district 

B. Climatic 

1. Warm vs. cold (ice skates, furs, sleds, etc.) 

2. Sunshine vs. rain (rubbers, umbrellas) 

3. Length of selling season (straw hats, awnings) 

C. Seasonal 

1. Study the time and under what circumstances an individual 
comes into your market 

D. Social 

1. Analyze customers 

2. Elements to take into consideration 

a) Who makes the purchase 

b) Who influences the purchase 

c) Purchase made more often by (1) Men (2) Women 

(3) Children 

d) Purchase made by (1) Rich (2) Middle class (3) Poor 

e) Purchase made by (1) Single people (2) Married people 
/) Purchase made by (1) Young (2) Middle aged (3) Old 

people 

E. Financial 

1. Conditions "good" or "bad" 

2. Transportation charges 



THE ADMINISTRATION OF MARKET PROBLEMS 317 

F. Competition 

1. Number of competitors 

2. Number of years each has been in the business 

3. Present total business of each 

4. Increase or decrease each has experienced during a period 

of years up to the present time 

5. Territory covered by each 

6. Policies of each in regard to (a) Sales (b) Advertising 

(c) Credits 

G. Distribution 

1. Number of purchasers among (a) Jobbers (b) Dealers 

(c) Ultimate consumers 

2. Number of possible purchasers among (a) Jobbers 

(b) Dealers (c) Ultimate consumers 

3. Methods of distribution 

a) Customer calls for advertised brand 

b) Dealer suggests brand, purchaser usually takes one he 

has seen or heard of 

c) Force the dealer 

Part III. Analysis op the Channels of Distribution 

A. The agencies of distribution 

1. The manufacturer or producer 

2. The importer, broker, or sales agent 

3. The wholesaler or jobber 

4. The dealer or retailer. He also may be a part of the 

manufacturers' organization 

5. The consumer 

B. The channels of distribution 

1. From producer to consumer 

a) By mail 

b) By salesmen or canvassers 

2. From producer to retailer to consumer 

a) Through unrestricted sale to retailers 

b) Through sale to exchange retail stores 

c) Through retail store? owned by the manufacturer 

(Rexall stores) 

d) Through sale to mail-order houses and other consign- 

ment agencies 



318 BUSINESS ADMINISTRATION 

3. From producer to wholesaler to retailer to consumer 

a) Through any wholesaler and any retailer (most used 

channel) 

b) Through producer's own territorial agents to any retailer 

c) Through producer's own territorial agents to exclusive 

retailers 

4. From producer to selling agent, importer, broker, or com- 

mission agent, to wholesaler, to retailer, to consumer 

C. Conditions relating to the product 

1. Salable by description, sample, or bulk 

2. Is there an element of "shopping" in the product 

3. Does selling require especially educated salesmen 

4. Will the product require special attention after it is sold 

in order to keep the customer satisfied 

5. Can a retailer profitably carry a full line of more than one 

competing brand or such a product 

D. Conditions relating to the market 

1. Establish satisfactory available depots 

2. Is the possible demand in the territory sufficient to support 

profitably a separate selling organization 

3. Are distributors in the territory accustomed to extend long 

and short terms of credit 

4. The functions of middlemen : (a) Sharing risk (b) Trans- 

porting goods (c) Selling (d) Financing (e) Assembling, 
assorting, and reshipping 

5. Is the period of time between one demand and the next 

from the same consumer shorter or longer than the period 
of time required for the most rapid transportation 
between producer and consumer 

6. Is the territory near enough to producer so that transporta- 

tion charges on the smallest unit demanded will not 
materially affect the price in competition 

E. Conditions relating to classes of distributors 

1. Class of dealers through whom it is most profitable to 
distribute 

a) The one most closely in contact with consumers pur- 

chasing competing or associated classes of goods 

b) The one which can distribute most rapidly 



See also p. 354. An Organization of the Sales Department. 



THE ADMINISTRATION OF MARKET PROBLEMS 319 

19. SOME PHASES OF MARKET ANALYSIS 1 

[It will be helpful for the student to think of this selection as a 
more extended statement of Part II of the preceding selection. It 
would be a useful exercise to work out a similarly extended state- 
ment for Parts I and III.] 

In order to determine to what particular class of customers his 
sales campaign should be directed, a manufacturer finds it necessary 
to study his market carefully under present conditions of keen com- 
petition. Blunderbuss methods are wasteful; hence they are becom- 
ing antiquated. The demand for any article varies according to 
purchasing power, living conditions, occupations, racial character- 
istics, climatic conditions, and numerous other influences affecting 
the different classes of consumers. The object of market analysis 
is to determine which class or classes of consumers constitute the 
potential market for the product, to ascertain where that class is 
located, and to find out what channels of distribution are most 
readily available for reaching them. 

There are few, if any, commodities for which equal per capita 
sales may be expected in all sections of the market, provided the 
market is more than local in its scope. In each district there are 
numerous classes of consumers with widely different tastes and desires, 
and the relative proportions of these classes in different districts 
always vary. In New York City, for example, the population of 
the metropolitan district in 1910 was 6,475,000. In the same year 
the population of the Cleveland metropolitan district was 613,000. 
From these figures it cannot be assumed that the New York market 
for any particular article is potentially ten times as great as that of 
Cleveland. New York represents the extremes of wealth and poverty-. 
Fifth Avenue and the Lower East Side are at opposite ends of the 
economic scale. Their wants and their purchasing power are wholly 
unlike and each differs from the large middle-class strata. In Cleve- 
land the relative proportions of these several classes, with their numer- 
ous gradations of purchasing power and of wants, are not the same 
as in New York. The population of Cleveland, furthermore, differs 
in its composite parts from that of Cincinnati or other cities, and these 
differences in the make-up of the population affect potential demand. 
Another line of demarcation is between urban and rural districts. 

1 Adapted by permission from M. T. Copeland, Business Statistics, pp. 1 78-83. 
(Harvard University Press, 191 7.) 



320 BUSINESS ADMINISTRATION 

Because of these diversities a reliable estimate of potential demand 
can seldom be made upon a gross per capita basis. 

In analyzing the market for some products, conditions other than 
those of a strictly personal nature must be taken into account. A 
manufacturer of electric flat-irons, for example, in analyzing his 
market found that in one city of 300,000 population 25,000 families 
were supplied with central station electric current. Thus there were 
25,060 possible customers in that city. In another city of approxi- 
mately the same size only 3,000 families were supplied with electric 
current; hence the potential market in this second city was much 
smaller. 

For some products the market is clearly denned; in such cases 
the market is easily analyzed by the manufacturer. The manu- 
facturer of machine tools, for example, knows that his product can 
be sold only to machine shops and engineering works and his task 
is to learn all the establishments existing and planned for in the 
territory that he wishes to cover with his sales organization. A 
similar situation confronts other producers of equipment and materials 
that are sold to manufacturers. Certain manufacturers of specialties 
sold to other classes of customers can encompass their market in a list 
that does not assume excessive proportions; a manufacturer of 
surgical appliances, for example, can readily obtain and utilize a 
practically complete list of possible customers. For the great mass of 
goods sold at retail, however, and for general supplies sold to manu- 
facturers, the market is of a different type and potential demand is 
much less easily estimated. 

In undertaking an analysis of the market for an article which is 
sold over a wide territory and for which a market index can be selected 
only with difficulty, too much attention may be given to wealth 
statistics, which are assumed to indicate incomes received by con- 
sumers. Wealth statistics, as a rule, have little significance in market 
analysis. In the first place, there are no reliable wealth statistics, 
and, in the second place, even if such statistics were available, they 
would give slight clue to the probable demand for any particular 
article. Wealth statistics are published, to be sure, by the United 
States government, but they are rough approximations. 

Wealth statistics are commonly reduced to a per capita basis, 
but a per capita wealth figure is of little worth for any purpose, for 
it does not show the distribution of the wealth. It makes a vast 



THE ADMINISTRATION OF MARKET PROBLEMS 321 

difference to manufacturers looking for prospective markets whether 
the wealth in any district is fairly evenly distributed among the 
consumers or concentrated largely in the hands of a few very rich 
persons; the quantity of any commodity purchased by an individual 
consumer seldom varies in direct proportion to his wealth or income. 

Finally, even if the wealth figures were available in such form 
that they could be relied upon and the distribution of the wealth 
among the population ascertained, the figures would not accurately 
indicate market potentialities. Not only are wealth statistics 
inadequate indices of incomes, but different classes of people engaged 
in different occupations and living under different conditions do not 
expend their incomes in the same way, even if those incomes are 
approximately equal. 

Average wages are another set of statistics occasionally referred 
to as furnishing an index of potential demand. The United States 
Bureau of the Census publishes average wage statistics, and similar 
figures may be obtained from other sources. An average wage, 
however, for all the persons engaged in manufacturing in Massa- 
chusetts, for example, includes the wages of numerous highly skilled 
workmen and also the wages of unskilled men, women, and children. 
The average is not representative and does not indicate that Massa- 
chusetts is necessarily a poorer potential market for any manufacturer 
than some other states where the average wages may be higher. 

Per capita consumption figures for large groups of commodities, 
such as clothing or foodstuffs, are finding their way into some adver- 
tising publications, as affording a guide to potential markets. The 
only per capita consumption figures which are worthy of consideration 
are those for such articles as coffee or sugar, where fairly accurate 
records of importation and domestic production are maintained. 
The census figures for the value of the product of the various manu- 
facturing industries are too inaccurate, in the form in which they are 
presented, to be acceptable as a basis for estimates of per capita con- 
sumption, and there is fcoo great uncertainty as to the amounts 
added to the manufacturers' selling prices in the course of the market- 
ing processes to warrant placing any reliance upon estimates of total 
retail selling value or total amounts paid by consumers for these 
products. These per capita consumption figures, moreover, are gross 
figures including many grades and qualities, some of which are 
virtually non-competing. Such statistics are of little aid in making a 
careful market analysis. 



322 BUSINESS ADMINISTRATION 

Instead of attempting to use statistics for wealth, income, or per 
capita consumption, the first task in undertaking a statistical analysis 
of a market is properly to determine just what class or classes of con- 
sumers constitute the potential market and, if there are varying 
degrees of demand, what demand may be expected from each class. 
For this, personal investigation or inquiry may be necessary. The 
next step is to ascertain the number of consumers of each class in 
each sales district. From these two sets of statistics the total potential 
demand for each district under normal conditions can be estimated. 

These figures for estimated potential demand, when compared 
with past sales records, show in which districts the best opportunities 
exist for sales development and serve as a basis for establishing quotas 
for salesmen. Ordinarily the comparison of sales records with 
estimated potential demand shows that the degree of saturation is 
not uniform in all markets. It is usually found upon investigation 
that a higher percentage of potential demand has been realized in 
some markets than in others, thus indicating the direction in which 
expansion may most readily take place. 

Another factor to which attention may be given in analyzing a 
market for some products is the percentage of distribution — that is, 
the percentage of the total number of possible retail outlets in which 
the goods in question are sold. A manufacturer of a food product 
sold in retail grocery stores generally wishes to induce as large a 
number of grocers as possible in each district to carry his product. 
If 75 per cent of the retail grocery stores are selling the article, he 
considers that he has 75 per cent distribution, without reference, of 
course, to the relative volume of trade of the retailers. 

In establishing sales quotas, allowances must be made not only 
for differences in degree of saturation and percentages of distribution 
but also for differences in general business conditions. From season 
to season general business conditions fluctuate in each district. / 
poor cotton crop may cut down the normal demand in the cotton 
states while a good grain crop in the same year may cause business 
to be exceptionally brisk in the wheat district. Hence the statistical 
indices of business conditions in each district must be taken into 
account in comparing salesmen's records with established quotas. 



See also p. 66. The Location of Retail Establishments. 

p. 74. An Outline of the Relations of Transportation to 
Site Location. 



THE ADMINISTRATION OF MARKET PROBLEMS 323 

20. SOME PHASES OF COMMODITY ANALYSIS 1 

In general, industries may be divided into two classes: those 
making utilities and those making style goods. Utilities comprise 
those articles which are bought by the consumer solely on the basis 
of quality or efficiency for the price and without thought of their 
pleasing his taste or fancy: e.g., agricultural implements are utilities. 

Style lines are those in which the consumer's preference is deter- 
mined by qualities other than utility — all those lines which appeal 
to individual tastes and fancies. In general they are the lines that 
involve the element of adornment and display, such as clothing of all 
kinds, jewelry, dress accessories, household furnishings and decoration. 

Many lines are at the same time utilities and style goods. For 
example, clothing and furniture in certain grades are bought primarily 
for serviceable qualities, but in other grades must meet the most 
exacting requirements of style. In automobiles, the truck is a utility; 
i.e., is judged on its ability to produce wealth. The pleasure car, on 
the contrary, is both a utility and a style carriage. 

In utility lines, theoretically, a single concern, if it excelled, would 
secure an entire monopoly; for if a manufacturer so perfected his 
manufacturing process that he was universally acknowledged to have 
the most efficient article at the price, theoretically everyone would 
buy his product. Practically, if one manufacturer can attain a very 
high degree of efficiency in manufacture, another can develop near 
enough to his standard to be a competitor; and practically, there is a 
value in a name, and there is a difference in public opinion. Hence 
it seldom happens that in any line where there is no protection by 
control of raw material or patents, anyone does attain an absolute 
monopoly. However, in these lines there tends to be concentration 
down to a very small number of manufacturers, unless freight con- 
ditions affecting raw materials or finished product necessitate a 
sectional distribution of plants. 

In the manufacture of utilities, as concentration progresses, it 
becomes increasingly difficult for a new firm to gain a foothold; for 
ordinarily the new manufacturer has to pass through an unprofitable 
period before he attains efficiency enough in manufacture to hold his 
own in competition with monopoly. In these lines where the eco- 
nomic tendency is toward concentration, there is no place for the 
small manufacturer unless he can adapt his product to meet some 
peculiar local need, and no place at all for the middle-sized producer. 

1 Adapted by permission from C. C. Parlin, "Why and How a Manufacturer 
Should Make Trade Investigations," Printers' Ink (October 22, 1914), 12, 74-76. 



324 BUSINESS ADMINISTRATION 

The manafacturer is likely to face the alternative of growing great 
or being crowded to the wall. 

In style lines, on the other hand, people buy not only quality and 
efficiency but also an intangible something which by its display 
represents the owner's individuality. Since there are many types 
of individualities there must be a considerable number of manufac- 
turers to supply the individual wishes. In the manufacture of a 
style line, whenever a manufacturer gets a majority of the market a 
style reaction sets in against him. Thus it comes about that no one 
can gain and permanently hold any large per cent of the total market. 
Hence there are bound to be a considerable number of producers, and 
their relative rank is likely to vary from season to season as a fickle 
public smiles first on one, then on another. In these lines the oppor- 
tunity for the small and medium-sized manufacturer continues. 

If the manufacturer produces an article sold to the consumer, it 
is important to know to what extent it is bought by men and to what 
extent bought by women, for men and women purchase through dif- 
ferent motives. 

A man ordinarily buys either at (i) the most convenient place, 
(2) by impulse, (3) in an accustomed place, or (4) by brand. He 
does not compare values and there is little tendency for his trade to 
be concentrated in shopping centers or in large stores. In general, 
men's trade is held back in the suburban places and remains scattered 
in a multitude of small establishments. 

Women's trade, on the contrary, is of two distinct kinds: (1) con- 
venience goods and (2) shopping lines. 

Convenience goods comprise notions, cheap cottons, and, in 
general, the lower end of women's purchases. 

Shopping lines, in general, comprise the upper end of women's 
purchases, such as cloaks and suits, draperies, carpets, millinery. In 
the purchase of convenience goods the woman ordinarily buys on the 
same motives as the man: that is, at the most convenient place, or 
on impulse, or sends the children to an accustomed store, or orders 
by brand. These lines, like the men's, find their sale in a multitude 
of suburban shops or crossroad stores and the manufacturer who would 
sell these lines must have the assistance of the jobber. 

In the purchase of shopping lines, on the other hand, the woman 
does definitely want to compare values (apparently in three stores) 
and the department store, which is organized to furnish facilities for 



THE ADMINISTRATION OF MARKET PROBLEMS 325 

women's shopping, tends to get the great bulk of this trade. Hence 
the trade in shopping lines is sharply concentrated in a comparatively 
small number of shopping centers and in a few stores within those 
centers. 

It is of prime importance to a manufacturer to determine in which 
classification his goods fall and to what extent either shopping or 
convenience buying is the prevailing motive. Upon this depends 
his method of sale. If he has a men's line or a convenience line, his 
distribution is widely scattered and the multitude of small merchants 
handling his wares prefer to buy of the jobber. Such a manufacturer 
therefore should not push his direct sales methods farther than is 
consistent with a jobbing policy. In some lines he will find it advan- 
tageous to supplement his jobber program by selling direct to those 
large stores to which he may sell without jeopardizing his jobber 
connections. If, on the contrary, he has a shopping line of any 
considerable volume, the direct sales method will be found best 
adapted to his needs; for the sale opportunities are confined to large 
stores, and, in general, large merchants prefer to buy direct. A clear 
understanding of such conditions is often necessary to determine the 
foundation principles of a selling system. 

21. MEASURING AIDS IN SALESMEN CONTROL 

A 1 

One of the first things that the new sales manager did was to study 
the individual territory of each salesman — estimate what it should pro- 
duce in sales for his house, and compare this result with what was 
being produced. 

In order to do this intelligently he procured a map cabinet and 
a set of state maps. Now most concerns whose policy it is to desig- 
nate a route for their salesmen use a map system for that purpose 
but many concerns depend largely on the initiative of their salesmen 
in this and many other respects, and judge their efficiency on aggre- 
gate results. 

But this sales manager found other uses for a map record — first 
he carefully drew the boundary lines of each salesman's territory 
on the maps wherever more than one salesman worked in the same 
state. Then he prepared a list of every town of five hundred popula- 
tion and over in each territory. That was the range of towns in 
which the goods could be sold profitably. 

1 Taken by permission from "Close-formation Tactics in Sales Development," 
Printers' Ink (April 1, 1915), 3-6. 



326 BUSINESS ADMINISTRATION 

These lists were then compared with the sales records, and each 
town checked to indicate whether the house sold any goods there. 
When the lists were completed they told an amazing and very inter- 
esting story. The average salesman was selling goods in only about 
half the towns in his territory. At one stroke the new sales manager 
had uncovered a vast field for sales development. 

He analyzed it more closely. First he transferred the informa- 
tion given in the lists to the territorial maps by using a greenheaded 
tack to designate every town where the company sold goods. Red- 
headed tacks were used to indicate the no-sale or opportunity towns. 
The maps then presented a comprehensive picture of each salesman's 
territory. The weak spots stood out in the limelight — a surprising 
number of them. 

Why? How can they be eliminated? These were the next 
questions. 

The lists were revised to show a more complete story, which 
included the population of each town, the names of all well-rated 
dealers in each town, and the exact amount of sales to each customer 
during the preceding year. These facts, when assembled, disclosed 
other valuable information. They brought to light special weaknesses 
of various kinds in individual salesmen. One salesman's record, for 
example, showed no sales whatever in towns of less than 5,000 popu- 
lation. Evidently he passed up smaller towns entirely. Another 
salesman seemed to take the opposite course. His small towns were 
nearly all well developed, but he secured very little business in the 
large cities. It was noticeable that some men almost invariably 
secured their orders from concerns whose commercial ratings indi- 
cated them to be the smaller stores in a town. In fact the lists and 
the maps together provided an excellent bird's-eye view of what each 
salesman was doing in his territory. 

A copy of the list pertaining to his territory was sent to each 
salesman, together with a letter directing his attention to obvious 
conclusions. The letter was not in the form of a reprimand, nor did 
it contain any definite instructions that would be construed as a 
positive order. It pointed out the opportunities of the salesman 
to increase his sales by more thorough application along certain 
definite lines. Furthermore, each salesman was told that the 
house was going to conduct a special direct mail campaign to 
interest every well-rated dealer in every town where he was not 
selling goods. 



THE ADMINISTRATION OF MARKET PROBLEMS 327 

The inference of course was that he was expected to call on those 
dealers. This had a distinct moral effect on most of the men, as they 
realized for the first time that their work was being closely watched 
in the house. Many of them took the cue and succeeded in opening 
some nice new accounts. Also, the mail campaign stimulated a good 
many inquiries which forced them to call on dealers they had never 
solicited before. 

As a matter of fact, however, it developed that most of the sales- 
men had too much territory — more than they could work thoroughly. 
Naturally they had hit only the high spots at first, and gradually 
settled down to devoting most of their time to regular customers. 
The sales manager arrived at this conclusion as the first season drew 
to an end, because the red-headed tacks were still very much in 
evidence on the maps. 

Here was a problem that required some thought. It meant 
putting on more men. The only way to make room for newsmen 
was to take territory from old ones — and the average salesman is 
jealous. A closer study of the maps and the red tacks helped to 
solve this problem. 

One example will illustrate what was discovered and what occurred 
in most cases: The territory of one salesman consisted of the whole 
state of Georgia. He lived in Atlanta and made that city his head- 
quarters. If you should draw a horizontal line through the center 
of the state you would find that Atlanta is located nearly in the 
center of the upper half. The tacks on the map of Georgia showed 
that this salesman got most of his business in the upper half of the 
state. In other words, he spent most of his time near home, and 
even in that section there were more red tacks than there were green 
ones in the lower part of the state. 

It so happened in this case that another salesman, who was a 
prodigious worker, had found the state of Florida too small to occupy 
all of his time. Consequently a slice of southern Georgia was taken 
from the Georgia man and given to the Florida man. The Georgia 
man kicked like a steer, at first, but gave up when he was shown that 
the business he really lost by the transaction was hardly enough to 
justify the time and expense of getting it. He was also shown a 
lot of red-headed tacks in the remaining part of his territory. 

During the next season both men increased their sales — the 
original Georgia man about $10,000 with less territory, and the 
Florida man got about $20,000 out of his new Georgia territory. 



328 • BUSINESS ADMINISTRATION 

B 1 

A star salesman for a wholesale crockery house came into the sales 
manager's office. "Mr. Stewart," he said, "I must have more money 
next year. My sales have been $20,000 more this year than last, and 
my expenses have increased only one-half of one per cent." He got 
the raise. 

Then came another. "Mr. Stewart," this salesman ventured, 
" I think I ought to have more money next year. Of course, I know 
that I haven't sold much more this season than last, but I have been 
with you fifteen years. I went out to that territory when you didn't 
have an account in the state. I have built up such a good will for 
the house that I believe the mail-order sales from my territory will 
exceed those from the territory of anyone else on the force." 

But Stewart did not know this, or if he did, he probably believed 
that the house was as largely responsible for the good will as the 
salesman. Stewart had a rather firmly rooted idea that a salesman's 
value to the house is determined by a single problem in division — 
total selling expenses divided into total sales gives percentage of 
selling cost. By this process Stewart found that this salesman's 
percentage was a trifle higher, and his total sales considerably lower 
than those of the star. Result — this salesman did not get his raise. 

Now Burke, a competitor of Stewart located two. blocks away, 
had the same requests under similar conditions from two of his sales- 
men. But in this case, the star was refused the raise, while the 
apparently poorer salesman secured a substantial increase. And 
in spite of this seeming reward of mediocrity at the expense of ability, 
Burke is the keener sales manager. The card index in his desk showed 
that although the star salesman had sold more goods than any other 
man in the house, and his expenses were as low as the rest, his net 
profit to the house was considerably below the standard. He had 
concentrated his efforts on the staples which ran into big figures but 
yielded small profits. The other salesman had devoted his time to 
the more profitable specialties, which held down his gross sales, but 
increased his net value to the house. Burke's cards showed this fact 
and this salesman got the raise. 

Two factors determine the salesman's value: his net profit to 
the house, as shown by actual figures; and his trade-building ability 
as reflected by mail orders, a continued patronage and good will. 

See also p. 192. Measuring Aids of Personnel Administration. 

1 Taken by permission from D. L. Kinney, "Determining the Value of Sales- 
men," System, XVII (1910), 402. 



THE ADMINISTRATION OF MARKET PROBLEMS 329 

22. MEASURING AIDS IN ADVERTISING CONTROL 1 

The shrewd advertiser of today before beginning a campaign 
makes three important tests. The public passes judgment: (1) on 
his copy, (2) on the mediums in which the copy is placed, and (3) on 
the field in which the medium circulates. 

After copy has been approved as a puller by the head of the firm, 
it ought to be put on trial. It should be keyed and the results care- 
fully checked. Other copy should be placed in rival publications or 
handled in the same routine of distribution and each month the 
advertisements should be interchanged among the mediums selected. 

A method generally used by big advertisers is to try copy for a 
general campaign in a daily newspaper in a large city, a daily news- 
paper in a small city, a trade or class publication, a national monthly 
of limited circulation, and a woman's magazine. The copy is crossed 
from publication to publication, and if there is any doubt about the 
fairness of the test the copy is inserted several times in the same 
magazine. By keeping count of replies and sales, it is easy to find 
which advertisement consistently brings the best orders. 

Some firms have kept records of this sort for years. Before they 
start a campaign they know accurately what pieces of copy "take" 
and what mediums bring the best returns on their offer. The adver- 
tising manager also has before him at the beginning of each test 
theoretical figures which indicate the number of returns he should 
receive from mediums or circularizing schemes with which he has had 
experience. If his best copy in his best mediums falls below this 
standard, he knows that he is in error and that he must locate copy 
trouble before the campaign may be launched. 

Testing frequently shows the advertiser the amount of space to 
use to get the best percentage of returns. In Cincinnati a test showed 
a manufacturer that single-column space secured as good results as a 
page advertisement in the same medium. 

Having built publicly approved copy, the general or local adver- 
tiser must still determine what classes of mediums and what indi- 
vidual periodicals or other distribution he will adopt, whether trade 
magazines, literary magazines, weeklies, monthlies, or any one of the 
many other mediums which offer to sell his product. 

The experienced general advertiser has a list of publications with 
low rates but limited circulation which pull in constant ratios to the 
national medium. Advertisements are placed in these mediums 

1 Adapted from W. S. Zimmerman, "Proving the Pull of Advertising," 
System, XXI (1912), 156-61. 



330 BUSINESS ADMINISTRATION 

during the copy test and as results of such tests advertising contracts 
are let with a keen forecast of the results. 

Care must be taken to insure, as nearly as possible, identical 
conditions for test and campaign. In national campaigns business 
conditions in the nation must be considered. A backward, cold 
summer or a warm winter must be considered in reckoning results. 
The length of time an advertisement runs, the space and position 
which it occupies in the medium used, the strength of competitors 
in the same field, must all be considered. When campaigns are 
conducted in newspapers, local conditions must be investigated. 
The hour and the day of the week when the advertisement appears 
have distinct- effects on results. Local season, celebrations, and 
disasters make differences. 

The chief asset of the effective advertiser is his record of past 
results. The man who believes that he can keep such results in his 
head or who guesses in selecting mediums for his campaigns is delib- 
erately draining profits into losses. One Chicago man, finding that 
the ordinary scrapbooks were not large enough for his purpose, secured 
the largest-sized loose-leaf invoice books. The advertisements are 
placed on manila sheets and kept until out of date. Then they are 
removed from the covers, tied up, and stored in a confidential file 
in the vault. With each advertisement is a printed slip showing the 
amount of sales and inquiries traced to the copy, the mediums in 
which it appeared, and the number of times it ran. Another sheet 
shows in detail the cost of the advertisement proportioned among the 
various departments. Advertising cost is accounted as sales cost. 

Another advertiser keeps careful watch of competitors' copy and 
the store shoppers keep him informed of results of the competitors' 
sales. The rival copy is filed in an invoice book kept for the purpose 
and notes are attached carrying the information secured. In this 
way he checks up selling methods of worth and, when occasion arises, 
improves upon them. The same book contains specimens of maga- 
zine advertising and copy in other lines of business which is written 
with a suggestive or distinctly original appeal. 

The success of one of the largest advertising agencies in the United 
States is admittedly based on the vast amount of evidence accumu- 
lated as to copy, seasons, prospects, fields, and publications. 



THE ADMINISTRATION OF MARKET PROBLEMS 331 

23. MEASURING AIDS APPLIED TO THE SOCIAL 
ENVIRONMENT 1 

How conditions may be analyzed and the facts thus sifted be 
utilized is illustrated by the recent experience of one great industry. 
By reason of its size and unquestioned leadership, perhaps, it had 
developed a blind side in its outlook on the selling field. 

Finally, the president brought matters to a focus. 

"It's time," he said, "to stop traveling around in circles." 

The work began next day. First a conference of all the manu- 
facturing executives was called. In company with the president, 
they sized up the production situation from every angle. They 
examined the goods from the point of view of salability, value, 
efficiency, safety in use. But a searching analysis of trade reports, 
salesmen's complaints, the results of technical investigation, and 
comparative tests established nothing except that the goods were 
sound. 

Interest centered next on the sales organization and the funda- 
mental selling situation. A study of the whole industry was first 
made. Graphic charts presented the volume of business of the six 
leading companies. They pointed back forty years. Getting the 
sales figures of two of these companies was easy; the other three 
guarded their statistics jealously, but sufficient data were secured 
to make the final estimate one very close to the actual figures. This 
sales chart showed conclusively that there had been no decrease in 
output which other firms had not felt more keenly; while the ratio 
of increase was always greater for the company than for the other 
concerns. In a word, not one firm, but the whole industry, was 
suffering the same sickness, whatever that might be. 

In a nutshell, the peculiar situation in the trade hinged on three 
separate developments: The first and by far the most important was 
the movement of population to the cities and the decrease of wild 
and uncultivated land. When a man moved in from the country 
to take a job in a store or factory, his use of the company's products 
virtually ceased. 

The second development was the passing of control of distribu- 
tion from the hands of the jobbers in the central markets and the 
multiplication of smaller wholesale houses to which the carrying and 
pushing of the company's line might be a matter of only casual 

1 Taken by permission from J. G. Fredericks and F. M. Faker, "Finding the 
Facts that Count," System, XXII (1912), 121-24. 



332 BUSINESS ADMINISTRATION 

interest. If the goods were called for, they would be supplied; but 
a consumer's demand was the only reason for stocking and handling 
them which these new houses recognized as imperative. 

The third transformation which had taken place in the distribu- 
tion field was the entry of the department store and the mail-order 
house into a field which had always been controlled exclusively by 
dominant specialty dealers in every town of any size throughout the 
country. 

To arrive at these conclusions thirty or forty graphic charts were 
compiled. 

This conclusion indicated as plainly as a "graph" itself what 
would have to be done to restore sales vigor and efficiency. Con- 
structive educational work was necessary to revive the interest of the 
urban consumer. His changed situation had to be taken into con- 
sideration in framing the new appeal. New uses had to be discovered 
and pointed out. Many of the products would need adapting to 
this changed physical situation. 

The advertising manager, in touch for the first time with the 
environment and needs of consumers, was able to plan a campaign 
which would turn the attention of these forgetful buyers again to 
the company's products. Knowing where the various classes were 
grouped, he was able to choose mediums and vary appeals so that 
each dollar spent earned its right proportion of inquiries and 
orders. His campaign directed at retail dealers had the same 
virtue of shooting at a mark made visible by the light of exact 
knowledge. 

The sales manager, in his turn, found the board of directors a 
unit in backing up the vigorous program he laid out for handling the 
jobbers and coaxing his dealers into line with the new program of 
co-operation. Even on the negative side, the investigation was not 
without result. The works superintendent, who had been urging 
an addition for two years, after studying the "graphs," acquiesced 
in the board's decision that for three years every surplus dollar was 
worth double its factory value if expended in the selling field. 



THE ADMINISTRATION OF MARKET PROBLEMS 



333 



24. MEASURING AIDS MAY RESULT IN 
EXPENSE STANDARDS 1 

[One of the most useful administrative devices the manager can 
have is that of expense standards. If he knows what is current prac- 
tice in various fields of expenditure he has a sort of norm against 
which to measure his own performances and with which to check 
his own figures in preparing sales budgets. Generalized statements 
of current practice by other firms are of course no final guide for the 
manager. He must always keep in mind his own peculiar 
circumstances. 

The tables of operating expense given below may be called 
expense standards. They show in percentages of net sales (net 
sales = 100 per cent) the various elements of expense in the businesses 
indicated in the captions. Wherein are you, a manufacturer of 
commodity x interested in the following tabulations ?] 

OPERATING EXPENSES IN RETAIL GROCERY STORES 



Item 



Lowest 
Percentage 



Highest 
Percentage 



Common 
Percentage 



Wages of salesforce 

Advertising 

Wrappings and other selling expenses . . 

Total selling expense 

Wages of delivery force 

Other delivery expense 

Total delivery expense 

Buying, management, and office salaries 
Office supplies, postage, other buying, 

and management expense 

Total buying and management expense 

Total interest 

Rent. . 

Heat, light, and power 

Taxes (except income and buildings) 

Insurance (except on buildings) 

Repairs of store equipment 

Depreciation of store equipment. . . . 
Total fixed charges and upkeep expense 

Miscellaneous expense 

Losses from bad debts 

Total expense 

Gross profit , 

Net profit (or loss) 



3-o 

O.OI 
O.II 

341 

0.26 
0.04 

0.66 
0.58 

O.OI 

0.78 

o.iS 
0-33 
0.07 



01 
02 
01 
07 
35 
19 
04 



9.0 



8.7 

2.82 

2.26 

9-94 
2.84 

2-37 
436 
5-97 

1. 18 
6.38 
2.28 

3-45 
0.98 
0.49 
0.62 

043 
2.17 
6.82 
1.97 

3-31 
22.8 



4-7 
0.2 

o.55 
5-8 

i-4 
1 .0 
2.4 
1.6 

0.1 

i-7 
0.9 

1.1 

0.25 

0.13 

0.14 

0.08 

0.25 

3-o 

0.5 
0.4 

14.0 



io-S 
6.05 Loss 



26.04 
9 . 29 Profit 



16.9 
2 . 3 Profit 



1 Taken from Bulletins 10 and 13, Bureau of Business Research, Harvard 
Graduate School of Business Administration. (Harvard University Press.) 



334 



BUSINESS ADMINISTRATION 



OPERATING EXPENSES 
In General Merchandise Stores 



Item 



Wages of salesf orce 

Advertising 

Wrappings and other selling expenses. . 

Total selling expense 

Wages of delivery force 

Other delivery expense 

Total delivery expense 

Buying, management, and office salaries 
Office supplies, postage, and other 

management expense 

Total buying and management expense 

Total interest 

Rent 

Heat, light, and power 

Taxes (except income and buildings) 

Insurance (except on buildings) 

Repairs of store equipment 

Depreciation of store equipment .... 
Total fixed charges and upkeep expense 

Miscellaneous expense 

Losses from bad debts. .* 

Total expense 



Gross profit 

Net profit (or loss) . 



Lowest 
Percentage 



2.1 

O.O3 

O.I2 

2-37 
O.26 
O.I4 
O.47 
I.08 

O.I2 

I.27 

0.54 
O.49 
O.06 
O.O9 
O.O7 
O.OI 

0.05 

2. II 

O.07 

0.02 

IO.O3 



9-8 

10.18 Loss 



Highest 
Percentage 



13.08 
I.79 
O.68 

14.16 

i-47 
1. 41 
2.22 
5-4 

0.7 
5-4 

4-95 

2.9 

0.74 

0.99 

1.76 

0.38 

0.77 

8-53 
0.98 
2.64 
29-5 



3i-S 
17.7 



Profit 



Common 
Percentage 



5-6 
0.3 
0.3 
6.4 
1.0 
0.67 

1-7 

2.4 



0.4 

o-37 
0.09 

0.3 
5-o 
0.3 
0.4 
15-5 



19.0 
3-4 



Profit 



In Shoe Departments of Department Stores 



Gross profit on merchandise 

Salaries and wages of buying force .... 

Other buying expense 

Total buying expense 

Salaries and wages of salesf orce.* 

PM's 

Advertising 

Wrappings and miscellaneous selling 

expense 

Total selling expense 

Delivery expense 

Management and office salaries 

Office supplies and expense 

Total management expense 

Rent f 

Heat, light, and power 

Insurance on stock and equipment .... 

Taxes 

Repairs and renewals of equipment . . . 

Depreciation of equipment 

Total fixed charges and upkeep expense 

Miscellaneous expense 

Losses from bad debts 

Total expense 

Net profit from merchandise operations 
Total interest 



Stock-turn , 



12.6 
o-39 

O.OI 

0.67 

4.92 

0.07 

0.49 

0.02 

7.2 
0.25 
0.8 
0.03 

1 .0 

1.5 

0.2 

0.18 

0.17 

0.2 

0.2 

3-5 
0.05 

O.OI 

19.0 

16.6 Loss 
0.69 



.89 



39-1 
3-44 
1 .92 

307 
13 5 

2-5 

7-3 

1-5 

18.9 
2.32 
4.0 
1.98 
4.78 

10. o 
2.6 
i-33 
i-35 
2.0 



1 

11 

6 

o 

33 



17 

7 

o 

26 

4 



9.82 
u-3 

3i 



28.1 

115 

0.25 

1-4 
8-4 
0.65 
1.9 

0-3S 
H-3 
0.6 
2.1 
o. 1 
2. 2 

3-4 
0.7 

o.55 

0-3S 

0.4 

0.4 

5-8 

2.0 

0.1 

23. 5 
46 
2. 2 

1-5 



THE ADMINISTRATION OF MARKET PROBLEMS 
OPERATING EXPENSES IN CHAIN SHOE STORES 



335 



Item 



Lowest 
Percentage 



Highest 
Percentage 



Common 
Percentage 



Gross profit on merchandise 

Total buying expense 

Salaries and wages of salesforce 

PM's... 

Advertising 

Wrappings and miscellaneous selling 

expense 

Total selling expense 

Delivery expense 

Management and office salaries 

Office supplies and expense 

Total management expense 

Rent 

Heat, light, and power 

Insurance 

Taxes 

Repairs and renewals of equipment . . 

Depreciation of equipment 

Total fixed charges and upkeep expense 

Miscellaneous expense 

Total expense 

Net profit from merchandise operations 
Total interest 

Stock-turn 



12-5 

O. 2 

2-5 

O.O3 

O.O 

0.02 

4-7 
0.0 
0.08 
0.01 

O.II 

o. 12 
0.08 

O.OI 
O.OI 
O. I 

i-55 

O. I 

9-85 

319 

0.53 



Loss 



45-5 
2-95 

16. 5 
2.1 

16.3 



1.0 
33o 
5-5 
5-o 
1.2 
6.0 
27.8 

35 
r.8 

2 
4 



33 



04 

4 

9 

5 



57-6 
20.3 

7-4 



28.4 
o-95 
6.9 
0.5 
2-3 

0.15 

9.8s 

o-37 

1.6 

0.1 

1-7 

8.6 
0.9 

o-3 
0.15 

0.15 
1.0 

11 .1 
0.6 

24.6 
3-8 
2-5 



1 .1 



4.6 



1-7 



25. MEASURING AIDS REFLECTED IN THE PROFIT AND 

LOSS STATEMENT 1 

[The student should take this opportunity to examine with some 
care one of the most important reports which the manager secures 
from his accounting system. It may be said to represent in figures 
the life history of the concern for the period it covers. If such a 
report is taken in connection with the kind of material presented in 
Selection 25, the manager may secure at least a preliminary notion of 
the spots at which expenditures may wisely be increased or decreased. 
If profit and loss statements are drawn at regular intervals, they 
may again be used as the first check on efficiency of operations in the 
various parts of the business. We shall have occasion to use the 
profit and loss statement again in a later chapter when we take up 
the manager's administration of finance.] 

1 Supplement to Publication of Graduate School of Business Administration, 
Harvard University, Vol. Ill, No. 3 (1917)- Bulletin No. 2, Bureau of Business 
Research. 



33& 



BUSINESS ADMINISTRATION 



PROFIT AND LOSS STATEMENT FOR SHOE DEALER 



for period extending from 19 to. 



.19. 



Merchandise Statement: 

1. GROSS SALES 

2. RETURNS 

3. ALLOWANCES 

u NET SALES 

5. NET INVENTORY OF MDSE. AT 

BEGINNING OF PERIOD . . 

6. PURCHASES OF MERCHANDISE 

AT BILLED COST 

7. FREIGHT, EXPRESS, AND CART- 

AGE ON PURCHASES OF MER- 
CHANDISE 

8. Total Merchandise Cost 

9. Inventory of Merchandise at End of 
Period 

10. Discount on Inven- 

tory of Mdse 

11. Depreciation of Mer- 

chandise 



12. NET INVENTORY OF MDSE. AT 
END OF PERIOD 

13. NET COST OF MERCHANDISE SOLD 

14. Profit on Merchandise 

15. CASH DISCOUNTS TAKEN ON 
PURCHASES OF MERCHANDISE 

16. Gross Profit on Merchandise .... 
Expense Statement: 
Buying Expense 

17. SALARIES OF BUYING FORCE 

18. OTHER BUYING EXPENSE . 

19. Total Buying Expense . . . 
Selling Expense 

20. WAGES OF SALESFORCE . . 

21. PREMIUM MERCHANDISE 

("PM's") 

2a. ADVERTISING 

23. WRAPPINGS AND OTHER SEL 

LING EXPENSE .... 

24. Total Selling Expense . 

25. DELIVERY EXPENSE . . . 

Management Expense 

26. MANAGEMENT AND OFFICE 

SALARIES 

27. OFFICE SUPPLIES AND EXPENSE 
28. Total Management Expense . 



Per- 
centage 



100% 



THE ADMINISTRATION OF MARKET PROBLEMS 337 



Fixed Charges and Upkeep Expense 

29. RENT 

30. HEAT, LIGHT, AND POWER . 

31. INSURANCE (Except on buildings) 

32. TAXES (Except on buildings) . 

33. REPAIRS OF EQUIPMENT . . 

34. DEPRECIATION OF EQUIPMENT 

35. Total Fixed Charges and Upkeep 
Expense 

36. MISCELLANEOUS EXPENSE . . 

37. LOSSES FROM BAD DEBTS .' . 

38. Total of Expense Statement .... 

3q. Net Profit (or Loss) from Mdse. Opera- 
tions 

Other Business Profits (or Losses) 

40. REPAIRING ....... 

41. MISCELLANEOUS PROFITS AND 

LOSSES ....... 

42. Total Other Net Profits (or Losses) . 

43. Total Operating Net Profit (or Loss) of 

the Period 

Application of Total Operating Net Profit: 

44. INTEREST ON CAPITAL- 

BORROWED 

45. INTEREST ON CAPITAL— OWNED 

46. DIVIDENDS ON CAPITAL STOCK 

47. Total Interest and Dividends . 
48. Final Surplus (or Deficit) for the Period 



Per- 
centage 



See also p. 482. What the Profit and Loss Statement Shows. 



26. MEASURING AIDS, QUOTAS AND BUDGETARY 

CONTROL 1 

That an accurate look-ahead is possible — that next year's sales 
can be determined in detail and prepared for, that the factory's work 
can be laid out and scheduled — I have proved to myself time and 
again. 

Planning ahead for the coming year cannot start the last month 
of this year. It must be begun years before — a quarter of a century 
in our case. For a planning-for-next-year system must have the 
most accurate basis: figures — cold, hard, mathematical figures; and 
facts — proved, recorded facts. 

1 Taken by permission from M. W. Mix, "Planning Next Year's Business," 
System, XVI (1909), 253-57. 



338 BUSINESS ADMINISTRATION 

Our records of business run back for twenty-seven years ; definitely 
tabulated as to sales by territories and lines of goods; as to produc- 
tion by costs and stocks on hand. That is the basis of our prophetic 
powers. Like the source of most things that look like genius, it is 
j ust — knowledge. 

Planning ahead means first determining probable sales. For 
selling the goods is the last step in the process of manufacture, but 
the first is determining the amount to manufacture. No wisdom 
lies in preparing to make what can't be profitably sold. 

The figures of last year's sales are the basis for judgment of next 
season's business. These figures are so tabulated that I know the 
exact sales made in each territory and through each agency, by lines 
of goods and by periods. Our goods are sold through two hundred 
and forty agents covering the whole country, through salesmen in 
our branch houses in the large industrial centers, and through sales- 
men working direct from the home office. Our sales are classified 
into thirty-eight different lines and are recorded under thirty-eight 
corresponding sales accounts. 

A record of our sales is kept for each one of these various sales 
units classified according to these thirty-eight accounts. The first 
source of our records is the orders as they come in from the various 
agents and salesmen. These orders are classified and tabulated until 
they finally reach me in a concentrated form. One sheet is given to 
the record of each sales unit for one month, classified according to 
the thirty-eight sales accounts and tabulated so as to show compari- 
sons with the previous month, with the same month the previous year, 
and with the total of the current and the previous year. The sheets 
for each sales unit are bound together in a pamphlet so as to bring 
together a complete record for a year. 

But the figures alone do not tell the "why"; they show what is 
going on but they do not show the reason. So another source of 
information is necessary — information concerning business conditions, 
concerning developments in our trade and among our customers, con- 
cerning the circumstances and methods of our selling agents, concern- 
ing the circumstances that surround each transaction and each 
development in our business. 

This nebula of facts and of human interest which envelops the 
selling end must be taken into consideration in judging the possi- 
bilities of business for next year. This information I glean from sales 
reports which come in every day from our salesmen and less frequently 



THE ADMINISTRATION OF MARKET PROBLEMS 339 

from our agents, from various mediums of trade news, from personal 
observation and letters, and from special reports. 

With these sources of information then — the figures of previous 
years' sales and the knowledge of trade conditions — the next year's 
sales quota is determined. Each unit of the organization is taken 
up in turn. With the comparative figures of previous years' sales 
before me, I call to mind the conditions in this territory and in this 
sales unit, determine what pressure for additional sales can be brought 
to bear, estimate what the conditions the coming year will probably 
be; then determine what increase all these factors are likely to 
bring and set a sales quota for this unit. 

After all, .1 regard the most important point in planning next 
year's work to be, not the determination of the sale's quota, but the 
laying out of the actual methods we will pursue to help the agent sell 
his quota. Because much of our business is handled through agents, 
the agency is the first source of next year's business to be studied. 

One of our special sources of information on the agent is an agency 
record, kept apart from the general sales records, where the facts 
regarding each agent are recorded. This card indicates at a glance 
what the agent's quota of sales has been for several years, how close 
he came to selling this amount, what the conditions in his territory 
have been, and any further general facts regarding him. The record 
also shows the definite aid in selling given him by the house — such as 
local advertising, circular letters, advertising literature — and what the 
cost of this advertising amounted to. 

Now suppose we find from our records that we have sold a par- 
ticularly large amount of some line in a territory. We find out the 
reasons, the methods by which these sales were made; if these can 
be duplicated we tell our other agents about them and we estimate 
how big an increase in their sales they should bring. If a certain 
line of local advertising or circular-letter work that we have done 
for one agent has proved successful, we duplicate it among other 
agents. If certain goods have proved particularly profitable, we 
give agents special methods for pushing them. And all these cases 
affect the quota finally determined. 

Local conditions, of course, often govern big sales; they must be 
considered in the agent's quota. Certain local changes during the 
past year may have raised sales to a point which cannot be maintained; 
new conditions about to materialize may greatly increase the possi- 
bilities of sales. 



340 BUSINESS ADMINISTRATION 

With the sales quota determined in detail, the manufacturing 
quota for the year is easily fixed: it is simply the sum of the thirty- 
eight lines of stock, totaled from the sales-unit sheets. Manufactured 
stocks are carried in the records of the manager of manufacture under 
the same general groupings as in the sales accounts. Subtracting 
stock on hand from the sales quota of each line, therefore, tells the 
quantity of each product to be manufactured during the coming year. 

This quota is, of course, not followed blindly by the factory; it 
serves rather to point the direction that next year's production will 
take. Its greater value lies in the basis it affords the manager of 
manufacture for systematizing his factory practice and reducing his 
costs. His sole object is to manufacture enough stock to keep 
sufficiently ahead of the sales demand that he will not be caught 
understocked, and yet not build on estimates so far ahead that there 
is liability of overstocking. 

See also p. 354. An Organization of the Sales Department, 
p. 831. Budgetary Control. 



27. PRICE POLICIES: WHAT THE MARK-UP SHOULD 

COVER 1 

These rules for figuring costs and profits are recommended (1 and 2 
regarded "debatable") by the National Association of Credit Men: 

1. Charge interest on the net amount of your total investment 
at the beginning of your business year, exclusive of real estate. 

2. Charge rental on all real estate or buildings owned by you and 
used in your business at a rate equal to that which you would receive 
if renting or leasing it to others. 

3. Charge in addition to what you pay for hired help an amount 
equal to what your services would be worth to others; also treat in 
like manner the services of any member of your family employed in 
the business not on the regular pay roll. 

4. Charge depreciation on all goods carried over on which you 
may have to make a less price because of change in style, damage, or 
any other cause. 

5. Charge depreciation on buildings, tools, fixtures, or anything 
else suffering from age or wear and tear. 

6. Charge amounts donated or subscriptions paid. 

1 Taken from A. M. Burroughs, A Better Day's Profits, p. 44. (Burroughs 
Adding Machine Company, 1915.) 



THE ADMINISTRATION OF MARKET PROBLEMS 341 

7. Charge all fixed expenses, such as taxes, insurance, water, 
lights, fuel, etc. 

8. Charge all incidental expenses, such as drayage, postage, 
office supplies, livery or expenses of horses and wagons, telegrams 
and telephones, advertising, canvassing, etc. 

9. Charge losses of every character, including goods stolen or 
sent out and not charged, allowance made customers, bad debts, etc. 

10. Charge collection expense. 

n. Charge any other expense not enumerated above. 

12. When you have ascertained what the sum of all foregoing 
items amounts to, prove it by your books, and you will have your 
total expense for the year; then divide this figure by the total of your 
sales, and it will show you the per cent which it has cost you to do 
business. 

13. ^ake this per cent and deduct it from the price of any article 
you have sold, then subtract from the remainder what it cost you 
(invoice price and freight), and the result will show your net profit 
or loss on the article. 

14. Go over the selling prices of the various articles you handle 
and see where you stand as to profits, then get busy in putting your 
selling figures on a profitable basis and talk it over with your com- 
petitor as well. 

See also p. 335. Measuring Aids Reflected in the Profit and Loss 
Statement. 



28. PRICE POLICIES: THE TURNOVER 1 

Turns are easily figured by dividing the sales for any period, at 
cost, by the cost of the average stock on hand during the period. 
Once he has secured turnover and cost figures for his store, it is not 
difficult for the retailer to demonstrate the added profit which an 
extra turn will bring. The net gains climb when the expenses are 
cut, the turnovers increased, the totals owing from customers reduced, 
or the gross profits lengthened. 

Investigation of the merchandising plans successfully used by 
merchants in five states shows that they are getting more turns in 
four ways: locating fines which move rapidly: weeding out the slow 
lines; setting stock limits; concentrating purchases with a few 

1 Adapted by permission from Wheeler Sammons, "More Turnovers" in System, 
XXV (1914), 236-39. 



342 BUSINESS ADMINISTRATION 

manufacturers or wholesalers. Some of these merchants are using 
only one or two of these methods, others all of them, but not one 
has discovered and tested a fifth plan. 

Once the fast- turning, profitable lines are known, they are pushed 
and the stock on the shelves cut to the lowest limit. The quicker 
the stocks in these lines change, the more possible it is definitely to 
satisfy customers and operate on a small investment. Manufacturers 
frequently maintain in-stock departments for their fast-turning lines, 
and thereby enable retailers to buy day-to-day supplies. 

The second plan for increasing turnovers is to weed out the lines 
which move slowly. Once the fast-turning stocks are tabulated, the 
less profitable lines immediately become evident. If these slow goods 
will not stand heavier mark-ups than the rapid lines, they are usually 
unworthy of shelf room. There are many lines which do not turn fast 
enough to warrant the retailer's investment, for depreciation gradually 
eats up the slender profit margins they offer. A huge sales volume 
might be built around these lines, and not a penny of net profit result. 
The stores which frequently go under when all is apparently prosperous 
are making this type of sales — their owners have not weeded out the 
slow lines. 

Third among the tested methods used by the merchants working 
in four states for rapid turns are definite stock limits and plans. The 
best way to prevent over-buying, in the opinion of these merchants, 
is to fix the lowest stock which will satisfy demand and then place 
orders accordingly. This, again, is a stockkeeping problem. 

There is one danger in buying too close, however. An Iowa 
variety store owner, who averages eight turnovers a year, men- 
tioned it specifically, although the majority of the merchants seen 
hy System's investigators referred to it. " Your profits are in buying 
close," he said, "but you are tempted to cut down your assortments, 
and that costs trade." 

The fourth method for securing more turnovers is to concen- 
trate the buying with a few wholesalers or manufacturers. To do 
so is helpful in two specific ways. First, there is less danger to the 
retailer of over-buying through duplication, and bookkeeping troubles 
are reduced. Second, the manufacturer or wholesaler is naturally 
unusually interested in the retailers who buy heavily from him. 
Especially in lines where style changes are important, co-operation 
between the retailer and the manufacturer is valuable to both 
Furthermore, the best " snaps" and the most favorable service go 
to the retailer who has concentrated his buying. 



THE ADMINISTRATION OF MARKET PROBLEMS 343 

29. PRICE POLICIES: THE DETERMINATION OF 
MARKET PRICE 1 

One of the most important problems which confronts every 
business man is the question of what price he can obtain for his 
product. Many factors co-operate to determine the market price, 
and many of these factors are beyond the power of the producer to 
control. The mechanism of price determination varies with the 
degree of power of price control possessed by the producer and with 
the character of the market. 

Economic theory has confined itself very largely to the exposition 
of the method of determination of market price in what economists 
call a perfect market, namely, a market in which there are many alert 
and experienced buyers and sellers; in which there is an effective 
organization for the purpose of mediating purchases and sales, record- 
ing prices, and diffusing important information with respect to present 
and prospective production and consumption and other factors bear- 
ing upon price; and in which there is no agreement among buyers or 
sellers, formal or informal, with respect to the prices to be bid or 
asked. Very few commodities have markets which possess all of 
these characteristics. It is not far from the truth to say that a few 
basic foodstuffs and raw materials produced under small-scale condi- 
tions and important securities widely held and traded on the stock 
exchanges in large amounts are the only commodities having perfect 
markets. 

Market price, regardless of the character of the market, is always 
determined by demand and supply, i.e., by the willingness of buyers 
to buy and sellers to sell. In the perfect market, the buyers will 
stand ready to buy but in amounts varying inversely with variations 
in the price, and the sellers will stand ready to sell, but in amounts 
varying directly with variations in the price. If the price settles 
temporarily at a point at which the offers to sell are greater in volume 
than the bids to buy, price-cutting competition between sellers in 
their eagerness to make sales will force the price down. If, on the 
other hand, the price settles temporarily at a price at which the offers 
to sell are smaller in volume than the bids to buy, price-raising compe- 
tition between buyers in their eagerness to buy will force the price up. 
The market price tends to settle at that point at which all buyers will 
be able to buy all they are willing to buy at that price, and all sellers 
are able to sell all they are willing to sell at that price. 

1 By J. Viner. 



344 BUSINESS ADMINISTRATION 

Any change in the demand or the supply, however, will change 
the location of this point of equilibrium. In a typical perfect market, 
such as the wheat market, the point of equilibrium is rarely constant 
even for an hour. News about the growing crops, of an impending 
war, of government plans to change the scheme of taxation, of heavy 
shipments of grain to market by farmers, affect demand and supply 
or the willingness of traders to buy or sell. Since, in a wholesale 
market, most of the purchasers are either made by middlemen who 
expect to resell to the actual consumer, or, if made by the consumers 
themselves, are in anticipation of future needs, any factor which 
affects the prospects of future prices will be reflected in a change in 
their present willingness to buy. Traders in the perfect market are 
constantly on the alert to get wind of prospective changes and any 
scrap of news, very often any rumor, will affect their willingness to 
buy or sell, and will, therefore, affect the market price. Since valu- 
able information may reach some traders before others, they con- 
stantly watch each other's bids and offers. If a group of traders bid 
prices up and make large purchases at the higher prices, other traders, 
confident that there must be some good reason as yet unknown to 
them for this anxiety to buy, will also buy and thus force prices up 
still further. Similarly, a disposition to sell on the part of some 
traders will spread to others and lead to a fall in price. 

A commodity is not suitable for large-scale and smoothly organized 
competitive trading unless it is by its nature homogeneous or is 
artificially standardized by careful and authoritative grading, so that 
it can be traded in by name without necessity of samples or bulk 
inspection. Price policy for the producer of a commodity which has 
a perfect market is a comparatively simple matter. He can sell only 
at the current market price, which is determined by the concurrence 
of a great many buyers and sellers. In the short run he has only two 
alternatives, to sell at the current price or to hold for a rise. In the 
long run, he must make guesses as to what the average future prices 
will be and adjust his production to the scale which would be most 
profitable at that average price. The outstanding characteristics of 
the perfect market price are, therefore, its quick responsiveness to 
changing conditions, its freedom from control by individual producers 
or buyers, and its uniformity at any one moment over the entire area 
of the market, if allowance is made for transportation costs. 

The most complete contrast to the perfect market is presented 
by the monopoly market. In the strict sense of the term monopoly, a 



THE ADMINISTRATION OF MARKET PROBLEMS 345 

commodity has a monopoly market when supply is controlled by a 
single producer or combination of producers. The monopoly pro- 
ducer has much greater control over price than does the producer for 
a perfect market. Within a wide range of prices, the monopoly 
producer will continue to make sales, although in varying amounts, 
if he varies his prices, whereas the producer for the perfect market 
will see his sales drop to zero if he demands a price higher only by a 
small fraction than that demanded by his competitors. It is not accu- 
rate to say, however, that the monopolist has complete control over 
price. As he raises his price, sales will fall somewhat. As he lowers 
his price, sales will increase somewhat, the degree of change in the 
volume of sales, as price changes, varying with the character of the 
demand for the commodity and the availability of substitutes. The 
monopolist is able to determine the price at which his product will 
sell, but if he is an efficient business man, he will endeavor to find the 
price at which profit per unit times total sales will yield him the 
greatest amount of total profit. He will also give consideration to 
the possibility that a price yielding a high profit will attract com- 
petitors into the industry or will lead to a demand for government 
interference with his industry. Monopoly price normally will remain 
constant for comparatively long periods and will be adjusted to 
changing conditions of costs of production or of demand by sharp 
changes at infrequent intervals. The outstanding characteristics of 
monopoly price are, therefore, its slowness of response to changing 
conditions and the great degree of control over price exercised by the 
producer. 

Between the perfect market and the monopoly market there is 
for wholesale markets, a gradation from those which closely resemble 
but not fully approach free and energetic price competition to those 
which closely but not fully approach complete monopoly control over 
price. Producers always desire as full a measure as possible of control 
over the prices of their products. They fear price competition, 
because with the importance in modern industry of direct or over- 
head costs, price-competition always threatens to become cut-throat 
competition. Moreover, they dislike frequent fluctuations in price. 
They seek every possible means, therefore, of withdrawing their 
products from the field of keen price competition, and in pursuit of 
this end they use a variety of devices such as special brands, trade 
marks, patents, style differentiation, even different methods of wrap- 
ping or different containers, to differentiate their products from those 



346 BUSINESS ADMINISTRATION 

of their competitors. If they succeed in developing a special demand 
for their products, such producers find that to some extent they can 
determine their prices independently of the prices of their competitors 
and still maintain their sales. The importance of advertising to 
producers of commodities only slightly differentiated from competing 
articles is obvious. Competition between such producers tends more 
and more to become competition in sales efforts, such as special 
displays, number of salesmen, volume of advertising, and tends to 
refrain from price-cutting as a means of stimulating sales. Special- 
ized commodities of this kind tend to be less responsive in their price 
to changing conditions of production or consumption than perfect 
market commodities, more responsive than monopoly products; their 
producers can exercise more control over their prices than producers 
of commodities for a perfect market, less control than producers for 
a monopoly market; the products are not standardized as between 
producers as compared with perfect market commodities; they are 
not as much differentiated from rival commodities as are monopoly 
commodities. 

The methods of differentiation — or specialization — of products 
discussed in the preceding paragraph generally can be applied suc- 
cessfully only to consumers' goods, where the purchasers are not 
sufficiently skilled or sufficiently interested purchasers to discover 
the substantial identity between rival products. Industries pro- 
ducing fairly standardized raw materials or intermediate products 
often avoid keen price competition by another method which may 
be called the follow-the-leader method of price determination. 
This method is most likely to occur in industries where one producer 
controls a large fraction of the total production and enjoys strong 
financial backing. The leading producer will determine the prices 
for his own products, and will issue a price list several times a year. 
The smaller producers, without any formal or informal agreement, 
will adopt this price list as their own. If they should not do so but 
should charge higher prices, they will make no sales so long as the 
leading producer and other producers adopting its scale of prices are 
able to accept additional orders. If they charge lower prices, they 
face the danger that the leading producer will under-cut their prices, 
and with his greater financial resources, will be able to force them into 
bankruptcy. The smaller concerns will often welcome the leadership 
of a strong producer in setting prices, as they are glad to escape 
price competition and feel that they can rely on the superior facilities 



THE ADMINISTRATION OF MARKET PROBLEMS 347 

ot the leading producer for gathering information to make the prices 
fixed upon those most profitable for the industry as a whole. The 
leading producer by this method gains most of the advantages of 
monopoly control while avoiding the expense of eliminating competi- 
tors and the danger of governmental interference and of public resent- 
ment. 

The retail market differs from all of these markets in that owing 
to its lack of organization and to the lack of skill, alertness, and infor- 
mation on the part of both buyers and sellers, prices differ from store 
to store on the same day for absolutely identical articles, and reflect 
only slowly and imperfectly changing conditions of production and 
consumption. 

30. PRICE POLICIES OF THE DISTRIBUTER 1 

The producer who today enters the market to manufacture and 
sell a commodity in competition with other producers of substantially 
identical products has open to him three general price policies. He 
may adopt one of these to the exclusion of the others, or may use them 
in combination. 

These three policies may be termed: (1) selling at the market 
minus, (2) selling at the market, and (3) selling at the market plus. 

1. Selling at the market minus is that policy which aims to increase 
sales by reducing price. The distributer who markets his product at 
a price range below that established for the identical commodity as 
sold by other producers not only attracts consumers from other dis- 
tributers but also brings into the market as consumers certain of those 
whose demand was before unexpressed because the price level estab- 
lished for the commodity was above that warranted by their 
subjective valuation on the commodity. 

This policy does not ordinarily involve a differentiation of the 
product from the stock product of like nature, nor the use of trade 
marks, brands, or trade names. The producer depends upon increased 
sales to give a reduced proportion of overhead expense and reduced 
costs of large-scale production, thus increasing his area of profit. The 
producer appeals to the consumer mainly through the difference in 
price level. Hence, the successful pursuit of this policy in a com- 
petitive market over a long period involves a continuing ability to 
sell the commodity for less than the price at which other producers of 
substantially identical products are willing or able to market them. 

1 Taken by permission from A. W. Shaw, "Some Problems in Market Distri- 
bution," Quarterly Journal of Economics, XXVI (1912), 712-18. Later published 
in An Approach to Business Problems (A. W. Shaw Company, 1916). 



348 BUSINESS ADMINISTRATION 

[It is obvious that this policy secures its best results when (a) the 
demand is elastic, which means that with relatively slight change in 
the price there is a relatively large increase in the amount demanded 
and (b) when the increased output can be made at a lower cost per 
unit. Notice the influence of indirect cost in this latter considera- 
tion.] 

The working of this policy, especially as to bringing new consumers 
into the market, is shown graphically in Chart I. 

Chart I 

Selling at the Market Minus 



This chart attempts to show graphically the operation on the demand side of 
the market of the price policy termed "selling at the market minus." On the 
ordinate OX is laid off a scale of prices for the commodity. On the abscissa OY 
are laid off the number of purchasers. The arc LM shows the number of pur- 
chasers at a given price, growing fewer as the price increases and greater as the 
price decreases. 

Now if OA represents the prevailing market price for the commodity, and OC 
the number of purchasers at that price, it is apparent that if the price is reduced 
from OA to OA', the new consumers will be brought into the market and the 
number of purchasers at the price OA' will be OC, a number greater than OC. 

It is somewhat in this fashion that the policy of selling at the market minus 
operates but the chart does not indicate the important element that other pro- 
ducers are selling at a higher level, and hence customers are attracted from them, 
as well as new customers brought into the market. 

2. Selling at the market has been the policy perhaps most char- 
acteristic of our scheme of distribution during the period when the 
stress was on production. It is still a common policy in the market- 
ing of staple goods. 

This policy consists briefly in the acceptance of the market price 
existing for the commodity as a fixed condition. The producer does 
not seek to attract purchasers by maintaining a price level somewhat 
lower than that at which other producers of the same commodity 
are willing to sell, nor does he attempt to establish his commodity 
upon a new and higher price level as a distinct commodity. He 



THE ADMINISTRATION OF MARKET PROBLEMS 349 

recognizes the market price for such a commodity as something 
objective, and sells his commodity at the established level. 

The acceptance of this price policy leaves open to the merchant- 
producer two general methods of increasing his area of profit. He 
may devote himself to a reduction in his cost of production by a 
better organization of his plant, or he may seek to increase his sales, 
thus giving economies of large-scale production and a reduced propor- 
tion of overhead expenses. 

Chart II 

Selling at the Market 




This is an attempt to show graphically the effect of a stimulation of increased 
demand for a commodity without any increase in the price at which it. is marketed. 

The ordinate OX is a scale of increasing price. The abscissa OY shows the 
number of purchasers. The arc LM indicates the number of purchasers at any 
given price, growing less as the price is increased and greater as the price decreased. 

If the established market price is represented by OA, the number of purchasers 
at that price will be represented by OC. If then by stimulating an increased 
demand for his product, the merchant-producer is able to increase proportionally 
the number of purchasers at each price level, the demand curve LM will be replaced 
by L'M', and at the price, OA, a greater number of purchasers, OC, will purchase. 

This chart does not, of course, show how customers already in the market are 
drawn from other merchant-producers to the purchase of a differentiated product 
for which a demand is stimulated at the same price level as the products of the 
other merchant-producers. 

If the merchant-producer adopts this second method, he must, 
in general, differentiate his product from that of his competitors and 
build up a demand for his particular product. To do this he must 
depend upon the same means that would be used to establish his 
product as a distinct commodity upon a higher price level. Trade 
marks, brands, and trade names, coupled with niceties of finish, 
evenness in quality, or more convenient packages, serve as the basis 
for an increased demand for the commodity upon the same price 
level as substantially identical products. When selling at the market, 
superior promptness in delivery may become a factor of great impor- 
tance in increasing sales. 



350 BUSINESS ADMINISTRATION 

3. Selling at the market plus is perhaps the most characteristic 
price policy of modern distribution. The exceptionally able dis- 
tributers have in recent years turned more and more to this policy. 
They refuse to accept as a fixed condition the market price for the 
commodities similar to those which they produce. They isolate 
their product, and establish it, practically as a new commodity, on a 
different price level. 

The whole basis of the policy is the differentiation of a product 
from other goods of substantially like nature by improvements, minor 
or substantial, and the identification of the product by trade marks, 
brands, and trade names. This done, the producer stimulates a 
demand for his product by calling attention to stability of quality, 
niceties of finish, improvements in package, or like modifications. 
He appeals to that portion of the consuming public whose subjective 
valuation upon the stock commodity has left them a so-called "con- 
sumer's surplus " over the market price. The differentiated com- 
modity is established on a new and higher price level, and is, to all 
intents and purposes, a new commodity. 

Chart III 
» Selling at the Market Plus 




This chart illustrates the effect of the price policy termed "selling at the 
market plus." On the ordinate is laid off a scale of prices for a staple commodity. 
The abscissa shows the number of purchasers. 

The demand curve LM indicates the number of purchasers at a given price, 
growing less as the price increases and greater as the price decreases. Then if 
OA represents the market price of the staple commodity, OC will represent the 
number of purchasers. Now if the merchant-producer differentiates his product 
from the staple commodity and stimulates a demand for it, the effect is to increase 
the number of possible purchasers at each price level. Thus the demand curve 
LM is replaced by the demand curve L'M'. 

Obviously the merchant-producer may dispose of the differentiated product at 
a price OA', higher than the price OA, without reducing the number of purchasers, 
OC. In other words, he can profit by the increased demand through raising his 
price rather than by increasing his sales. 

Chart III shows graphically the operation of the price policy 
termed " selling at the market plus." 



THE ADMINISTRATION OF MARKET PROBLEMS 351 

31. PRICE POLICIES: PRICE MAINTENANCE 1 

["Price maintenance," says Cherington, "is the arrangement by 
which manufacturers of identified merchandise, made and sold under 
competitive conditions, agree with some or all of the distributors of 
this merchandise concerning the price at which it is to be re-sold." 
Obviously enough this is one of the devices that modern business men 
have adopted as a means of securing greater stability in their market 
relations. Considerable question has arisen concerning the legality 
of such agreements. The following selection shows the form of notice 
and agreement which Robert H. Ingersoll and Brothers print upon 
the boxes in which the Ingersoll watches are sold. It is particularly 
interesting in that the attempt to phrase the agreement so that it 
will be legal stands out in a very obvious fashion.] 

In selling this watch to the dealer we withhold from him the right 
to use or refer to our name, trade mark, guarantee, reputation or 
selling helps in connection with selling, offering, advertising or display- 
ing for sale this watch, unless and until the dealer (1) shall have 
agreed that he shall not so sell, offer, advertise or display this watch 
with our name, trade mark or guarantee attached, nor so use or refer 
to our name, trade mark, guarantee, reputation or selling helps as 
to injure us unlawfully in our good will or other property, and (2) 
shall have admitted for all purposes that selling, offering, advertising 
or displaying for sale this watch (if our name, trade mark, or guarantee 
be attached, or our name, trade mark, reputation, guarantee or sell- 
ing helps be used or referred to) at any other retail price than $2.50 
(including Revenue Tax), or with or as any donation, discount, rebate, 
premium or bonus, depreciates our good will and other property, and 
(3) shall have agreed that we shall have the right, upon our written 
request (unless the dealer shall have previously sold this watch), to 
repurchase from him this watch, if then merchantable, at our ruling 
trade price therefor, or if this watch shall then be damaged, at such 
prices as shall then be agreed upon. Upon written request of any 
dealer we agree [a) to sell to him, at our ruling trade price for this 
watch, a duplicate of this watch (withholding from him, however, 
the right to use or refer to our name, trade mark, guarantee, reputa- 
tion or selling helps), which duplicate watch shall not bear our name, 
trade mark, or guarantee, but which duplicate watch the dealer may 

1 Taken from the Notice and Agreement used by R. H. Ingersoll and Brothers. 



352 BUSINESS ADMINISTRATION 

sell or otherwise dispose of as he pleases, provided that in so doing 
he refrains from using or referring to our name, trade mark, guarantee, 
reputation or selling helps, and (b) to repurchase from the dealer 
this watch, if then merchantable, at our ruling trade price therefor, 
or if then damaged, at such price as shall then be agreed upon. 

By selecting to purchase, sell, offer, advertise or display for sale 
this watch with pur name, trade mark or guarantee attached, instead 
of a duplicate watch without our name, trade mark and guarantee, 
the dealer agrees that he may use or refer to our name, trade mark, 
guarantee, reputation or selling helps only upon agreeing to the terms 
and conditions stated in (i) and (3) above and admitting for all 
purposes the facts and conclusions stated in (2) above, and then only 
for the purpose of selling, offering, advertising or displaying for sale 
this watch, and the dealer expressly agrees to be bound by said terms, 
conditions, and admissions. The dealer may sell or otherwise dispose 
of this watch as he pleases, after first removing this Notice and Agree- 
ment, and our name, trade mark, and guarantee, and returning to us 
our selling helps, and refraining from using or referring to our name, 
trade mark, guarantee, reputation and selling helps, but he has no 
right to use or refer to any of them in violation of said terms and 
conditions, nor to injure us unlawfully in our good will or other 
property. 

32. THE ADMINISTRATION OF SALES AND 
ADVERTISING 1 

The feature of the problem of sales-force organization which par- 
ticularly appeals to us in this discussion is the question: How is the 
sales force, either good or bad, to be co-ordinated with the advertising 
activities ? 

Consideration of this question soon shows us that it has two 
distinct parts: (1) How is this co-ordination to be brought about in 
the actual operations of selling and advertising? and (2) How are 
these two separate departments to be organized so as to be admin- 
istered without conflict? One part deals with co-ordination "on the 
road," where the sales are made, and the other deals with co-ordination 
"in the office, " where the sales are planned. 

1 Adapted by permission from P. T. Cherington, Advertising as a Business Force> 
pp. 295-323. (Doubleday, Page and Company, 1913.) 



THE ADMINISTRATION OF MARKET PROBLEMS 353 

The American Multigraph Sales Company, makers of the "Multi- 
graph" light printing device, has had particular success in its efforts to 
secure co-ordination between the advertising and selling departments. 

Some time ago change was made in the sales management of the 
American Multigraph Sales Company. For eighteen months before 
that time there had been no advertising manager. The sales manager 
and advertising manager could not pull in double harness. The 
advertising manager quit. A successor was not appointed during 
the remainder of that sales manager's connection with the company. 

The new sales manager looked at things in a different light. He 
believed that the business required an advertising executive as well 
as a sales executive; that perfect team work between the two was 
essential and possible; that the sales manager should be, in a sense, 
assistant advertising manager and the advertising manager assistant 
sales manager; that with the work of each clearly defined there should 
be no confusion, and that with this kind of a working arrangement 
the business would develop as never before. 

With the beginning of the new regime a series of sales contests 
was started. The origination, as well as the details of carrying out 
these contests, was left to the advertising manager. Each month 
he submitted his suggestions to the sales manager and a conference 
was held on them. 

In order that the advertising manager might be kept fully informed 
on the progress of sales, he was given the same weekly sales reports 
that the general sales manager received and made acquainted with 
all conditions in the field. It was realized at the outset that unless 
he was fully informed on all sales conditions he could not thoroughly 
analyze them. 

F. Manning, the general sales and advertising manager of the 
Grape Products Company, of Northeast, Pennsylvania (makers of 
Walker's Grape Juice), contends that the sales and advertising 
managerships should be one. "Selling" and "advertising," while 
seemingly considered as two separate branches of business endeavor 
and expense, are, in fact, inseparable units of the same thing, "sales- 
manship." And while the actual taking of orders may be directed by 
one head, and the advertising of the article covered by these orders 
may be directed by another to good effect, the fact that these two 
great selling forces, directed at the same objective and being each 
dependent upon the other, so similar in character and results, should 



354 BUSINESS ADMINISTRATION 

certainly indicate consolidated management, just as do the various 
branches of manufacture. One rarely encounters a factory in which 
all the various divisions of production are not directed by a single 
head — under supervision, perhaps, but with one center of manage- 
ment and responsibility. This being the case in manufacture, why 
should the combined selling effort be handled as two separate branches 
of the business organization? 

Advertising is as dependent upon the selling for results as the 
salesman is dependent upon advertising for consumer demand with 
which to interest the retailer and secure prestige with the jobber. 
No dealer, whether retailer or wholesaler, buys an article simply 
upon its merit — he buys upon salability first, price and profit next, 
and then he may be interested in quality. 

But a ready sale, a steady consumer demand, is always the first 
thing he considers in the purchase of goods for sale. This premise 
granted, why should not the same head direct both the element 
needed to secure signed orders — the ultimate result? This neces- 
sitates a close interlocking of the sales and advertising details — call 
for team work of a high order — and the success of its execution deter- 
mines the exact generalship exercised in the carrying out of the 
composite " sales" and "advertising" campaign. And generalship 
means profit, efficiency, distribution, and lasting results. 

Therefore, in selecting the sales advertising head, the question 
of choice should be determined by the qualifications of the individual, 
rather than by whether he be a salesman or an advertising man. But 
the direction of these features of the business should certainly be 
centered in one man. 

33. AN ORGANIZATION OF THE SALES DEPARTMENT 1 

[The following material is taken from the preliminary reports of 
two committees of the Taylor Society. It is interesting not only as 
a sketch of an appropriate organization of a sales department but 
also in its position "that planning and performance are the two 
major functions in distribution as well as in fabrication."] 

Selling seems to break down into two major functions, distinct 
in their nature and in the types of personnel required for their per- 
formance : 

I. The making of larger plans for the marketing of a products 
involving analysis of the market and the product, the preparation, 

1 Adapted by permission from Bulletin of the Taylor Society, V (1920), 236-43. 



THE ADMINISTRATION OF MARKET PROBLEMS 355 

of master schedules, and the co-ordination of production, financial 
and selling resources called Sales Engineering, Sales Planning, Mer- 
chandising, Merchandise Control, etc., and in many instances cared 
for by advertising or selling agencies. 

II. The actual conduct of the selling operations, involving the 
detail .planning of selling operations, the selection, training, and 
direction of the sales force, the detail planning and conduct of selling 
operations when salesmen are not used, and all contacts with the 
customer; called in this report Sales Operating. 

~. The sales engineering function presents at least three distinct 
phases: (a) field research; (b) technical assistance; (c) master 
planning and scheduling. 

a) Field-research activities. — As a field research function, sales 
engineering should make its services available for all parts of the 
plant organization. Some specific things it can usually include in 
its research activities are: 

1. Products: to be added; to be eliminated; changes; stand- 
ardization; present uses; new uses; seasonal factors; territorial 
factors; trade reactions; competitive products. 

2. Marketing policies and methods: present trade channels; 
potential trade channels; trade customs; trade reactions; competi- 
tors' activities; standardization; containers and packing; quotas 
and statistics; prices and margins; present markets and volumes; 
potential markets and volumes; assistance to customers; salesmen's 
training; warehouse and branch locations; trade organizations. 

3. General research: administrative and management problems; 
research for all operating departments. 

b) Technical activities: — The personnel of sales engineering 
should be such that it can be of technical assistance to the entire 
business organization. While sales engineering utilizes and con- 
tributes to the entire resources of the business organization, it is 
essential that no duplication of effort be brought about by the segre- 
gation of this major function; in fact, this segregation of sales 
engineering should invariably tend to diminish duplication of work. 

The range of research and other activities involved in sales 
engineering is indicated by the following synopsis; it is possible 
that in a large organization some of them may assume such impor- 
tance as to be recognized as separate functions: 

1. Products: study selection and standardization of types and 
sizes, materials, finishes, markings, packing. 



356 BUSINESS ADMINISTRATION 

2. Advertising: furnish data on new products, product changes, 
new uses, new markets, trade reactions, competitors' activities, 
prices, trade customs, seasonal factors, territorial factors. 

3. Selling: furnish data on prices and margins, salesmen's 
compensation, selling equipment, seasonal factors, territorial factors, 
trade resistance, economics factors or trends. 

4. Sales service: ascertain deficiencies, suggest remedies, suggest 
other service activities. 

5. Markets or sales fields: report changes, discover new markets, 
suggest new policies or methods. 

6. Competitors' activities: watch and report and suggest methods 
of combating. 

7. Trade organizations: report activities, report probable effect 
on sales policies, determine possibilities of co-operation. 

8. Legislation : watch and report and suggest necessary action. 

9. Merchandise stocks: regularly check and report and suggest 
necessary action. 

10. Patents and copyrights: watch and report and suggest 
necessary actions. 

n. Statistics: suggest necessary compilations, analyze and 
report changes or trends, and interpret and suggest necessary action. 

12. Complaints: analyze, compile records, and suggest necessary 
action. 

c) Master planning and scheduling. — Sales engineering should 
become the co-ordinating function of the entire business. In this 
field it can relieve the administrative and managerial executives of 
many of their most troublesome and time-consuming problems. In 
this activity sales engineering should strive to be months ahead of any of 
the operating divisions. Only thus can the purchasing, financial, 
personnel, and production divisions have adequate time to plan for 
their respective activities. (See p. 831. Budgetary Control.) 

The synopsis below is only to suggest some of the steps in a 
master plan and schedule. The variations necessary to meet the 
problems of specific industries are almost infinite. 

1. New products: plan types, sizes, materials, finishes, markings, 
and packings. 

2. New and old products: plan and schedule initial requirements; 
plan and schedule yearly and monthly requirements; plan and 
schedule general marketing policies and methods; plan and schedule 



THE ADMINISTRATION OF MARKET PROBLEMS 357 

sales service activities; plan and schedule general advertising policy; 
state seasonal and territorial limitations; plan and schedule general 
activities of each division affected by project to establish order of 
work and definite responsibilities; plan and schedule warehouse 
distribution; plan dealers' selling equipment; plan salesmen's 
selling equipment. 

II. Sales Operating seems to break down into two principal func- 
tions: 

a) The detail planning for, the preparation of materials for, 
and the supervision and control of, all elementary selling processes. 
(This function breaks down into elementary functions or processes.) 

b) The actual conduct of sales operations in accordance with 
the planning and control established in (a) above. (This function 
also breaks down into elementary functions and processes.) 

This report is concerned with (a) only; investigation of (b) is 
to come later. 

The accompanying chart sets forth briefly the general scheme. 

1. General Administration determines or approves all general 
policies and plans, including general sales, production, personnel and 
financial policies and plans. 

2. Sales Engineering studies markets and products and recom- 
mends to General Administration general or specific, continuous or 
limited, sales campaigns. Its recommendations, as adopted by 
General Administration, take the form of general schedules which 
co-ordinate selling, production, personnel and financial operations. 
These general schedules pass to the various operating departments 
for execution, and constitute the master task for their co-ordinated 
execution. 

3. Sales Operating receives these general schedules, or master 
task, and proceeds to execution. The first step is planning details of 
execution and establishing controls for execution; breaking the task 
up into elementary tasks for performance by functionalized branches 
or individuals. The elements of planning and control are emphasized 
on the chart. 

After detail operating schedules, orders and instructions are 
prepared; these pass to those respectively responsible for their 
execution in detail: advertising, selling, training, warehousing, 
traffic, etc. 

It is interesting to compare production functions with selling 
functions. 



358 



BUSINESS ADMINISTRATION 



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THE ADMINISTRATION OF MARKET PROBLEMS 359 

I. PRELIMINARY 

Before the first. step of actual selling is taken, a sales plan, general 
or specific, continuous or limited, is approved by the administrative 
authorities. This plan should have been worked out by some part 
of the organization, based on a detailed research into market condi- 
tions, study of the product, financial and production resources, etc. 
The part of the organization which has prepared this plan may have 
been certain delegated executives or a Sales Engineering Department 
termed as such or perhaps as a "Sales Planning Department," a 
" Merchandising Department," or a "Merchandising Control Depart- 
ment." 

This approved plan takes the form of what may be termed 
"Master Schedules," which instruct and co-ordinate production, 
finance, and selling. 

In the Taylor System of production the Engineering Depart- 
ment first prepares drawings for the product and for special machinery, 
tools, dies, etc. ; and prepares lists of materials, specifications, etc. 

II. SALES OPERATING 

Having been provided with the approved general sales policy 
(master sales schedules) which it may have had a share in formulat- 
ing, the Sales Operating Department plans its work of execution, first 
providing for control of execution in order to assure precision in its 
work. 

The first major function of sales operation is, therefore, planning 
the operations and their control. 

This planning and control function divides naturally into (1) 
analysis, (2) making sales schedules, (3) carrying out the detail 
schedules, (4) checking results, (5) improving methods. 

In the Taylor System of production the production order, accom- 
panied by the drawings, lists of materials, etc., goes first to the 
Planning Room. 

1. Analysis. — (a) Analysis of the information gathered by the 
preliminary survey concerning the market, the product, competitive 
products, service that the product and the organization may render 
to customers, etc. From this analysis results: 

b) The laying out of a definite procedure for the sale and dis- 
tribution of the product. This includes the plan for the extent and 
composition of the elements that are to constitute the selling organiza- 
tion including its field executives and salesmen. 



360 BUSINESS ADMINISTRATION 

c) Information is classified and a list prepared of the supplies, 
equipment, and samples or stock required by the several units which 
are to carry on the selling and distribution of the product. 

d) Responsibility and method is determined upon for the selection 
of supervisors and salesmen, their training and assignment to ter- 
ritories and duties, also for the education of dealers, and distribution 
of the product to branches, to customers direct or through general 
distribution centers or warehouses. 

e) Analysis for the purpose of such preparation is followed by 
continuous analysis of performance based on summaries of branch 
office and Home Office records, from the angles of sales volume, dis- 
tribution as to territory and as to commodities, and facts and figures 
presented by the financial, production, and sales engineering depart- 
ments. 

These may result in: 

/) Periodical recommendations concerning changes in the method 
of selling, distribution, or of remuneration of various elements of 
the sales force; possible changes in the general sales policy or at least 
in its application, also possible changes or improvements in the 
product itself. 

In the Taylor System of production the first process in the Plan- 
ning Room is analysis of the production order and the specifications 
by the Production Clerk, who lays out a general plan of production, 
and is responsible for subsequent processes in the planning room, and 
for modification of plans to meet emergency situations. 

2. Making detail schedules. — (a) To execute the sales plan laid 
out as a result of the analysis outlined, detail schedules are prepared. 

The various processes referred to are timed so as to properly 
co-ordinate, and are possibly charted graphically. 

Thus it is decided, based materially as to the time when necessary 
product and finances are to be available, when advertising begins; 
its volume and character; when the training of field executives and 
salesmen is to begin; the extent of such training; when shipments to 
warehouse or agency are to begin if the plan provides other than 
direct shipment to customers on actual sale orders, etc. 

In this way a detail schedule is laid out for each operation which 
forms part of the general marketing plan. 

b) Instructions in detail, and the supplies of all kinds that they 
require, are prepared and assembled for the carrying out of every 
planned step. These include instructions for each unit, such as the 



THE ADMINISTRATION OF MARKET PROBLEMS 361 

field instructors, supervisors, agency managers and salesmen. Also 
material for the instruction of salesmen and of dealers; advertising 
material; material for service to dealers or customers; arrangement 
of selling territories and salesmen's routes; provision for samples and 
expense funds, etc. 

In the Taylor System of production a corresponding function is 
performed by the Route Clerk, who makes route charts, route sheets, 
prepares purchase orders, instruction cards, move-material and work- 
order slips, but does not issue them or start work on the production 
order. 

3. Carrying out the detail schedule. — The detail work of planning 
having been completed, the actual work of marketing the product is 
started, under the supervision and control of the General Sales 
Manager. 

a) Field executives, if required, are selected. 

b) With their assistance, otherwise by the sales operating depart- 
ment heads delegated for the duty, salesmen are selected. 

c) Instructions and supplies are issued to the training section 
and training begins. 

d) Assignment to territories is made at time of selection, or as 
the results of the training course develop. 

e) Samples, advertising matter to be carried, order and report 
forms and other supplies needed are issued to salesmen and they 
begin work. Expense funds are established at the same time. 

/) As provided by the time schedule determined upon, instructions 
are sent at the proper time to the traffic and shipping department or 
warehouses, advising them what initial stock shipments to make or 
advising them to be in readiness to execute any certain predetermined 
plan of executing orders for stock or delivery on sales. 

g) In like manner activity is started among all operating units. 

In the Taylor System of production a corresponding function is 
that of the Order of Work Clerk, who takes the move-material and 
work-order slips previously prepared by the Route Clerk and issues 
them; i.e., starts worK. He arranges the order of work and keeps a 
balance of work record; he arranges who shsll do what, and when, 
in accordance with the plans. 

4. Checking results. — Results are assured only by constantly check- 
ing performance against plans — actual sales against estimated sales 
or quotas, costs of selling against estimated costs, etc., not only as to 
totals but as to each operating unit or section of territory. 



362 BUSINESS ADMINISTRATION 

a) The reports of the work of the various operating units, and 
particularly of each branch, dealer and salesman are secured for reason- 
ably short periods that can be compared with corresponding periods. 
These are tabulated and summarized and compared, performance 
against plan, and performance against previous performances, and 
supplied to both administrative executives and executives in charge 
of units concerned. 

b) Costs as shown by reports from field executives, branches and 
even salesmen, and figures supplied by the auditing and accounting 
departments are tabulated, summarized, set over against budget 
estimates and previous costs, worked out in actual amounts and in 
percentage as to sales. These and similar reports and statistics are 
supplied to the administrative heads of the business and to the heads 
of the field activities concerned. 

In the Taylor System of production the corresponding functions 
are performed by the Progress Record Clerks, and the Cost Clerks, 
who check progress and costs as work is performed; and by the inspec- 
tors in the shop, who inspect for quality and quantity. 

5. Improving methods. — Aside from the analysis first referred to, 
and the checking of results, there are in many organizations provisions 
for the improvement of methods, such as: 

a) Investigations for improving selling technique — methods of 
personal salesmanship, demonstrations, preparations of selling port- 
folios by salesmen themselves from material and testimony secured 
from the consumer or dealer; methods of service to customers, etc. 
Even time studies of sales operations are being made. 

b) Investigations for determining rates and also methods of 
remuneration, especially if a commission plan, or salary and bonus, or 
any other form of compensation is in use or under consideration 
whereby the amount earned is affected by the sales performance of 
the individual. 

In the Taylor System of production this function is performed by 
specialized investigators — methods, time study and rate setting 
specialists. 

See also p. 624. Control of Manufacture under the Taylor System. 



D. The Work of the Purchasing Agent 
It is a quite general error to regard the work of the sales manager 
as the relationship of the manager to the market. Such an error is 
easily committed in a period when the manager is eagerly seeking 



THE ADMINISTRATION OF MARKET PROBLEMS 363 

markets in which to dispose of his goods. Perhaps it is even more 
easily committed in view of the fact that sales are the great source 
of income for the ordinary business and accordingly sales assume 
great significance in managerial eyes. 

In point of fact, however, purchasing activities are as truly 
manifestations of the manager's relationship to the market as are 
sales activities. They ought not, furthermore, be so frequently 
crowded from the center of the stage of managerial thinking by the 
somewhat overweening sales function. They are as truly one of the 
key activities as is sales. In a way, this fact is recognized by a 
familiar saying in commercial businesses: "Well bought is half sold." 
That the fact is coming to be recognized in manufacturing and 
indeed in other businesses, is shown by such symptoms as an increasing 
interest in the function, by a developing literature, and by the 
establishing of associations of purchasing agents. In these days of 
search for lower costs of production and of emphasis upon stand- 
ardized equipment the purchasing agent may make great contribution 
to business profits by getting the "right goods to the right place in the 
right quantities at the right time." 

It is not necessary for us to review market functions and market 
structures in connection with our survey of the work of the purchasing 
agent. It will be sufficient to get a general view of his functions (see 
Selections 34, 35); to see the use of experimental and scientific 
methods as opposed to old "rule of thumb" and unfounded "opinion, " 
or opinion based on custom and tradition (see Selections 36-38); 
a,nd to secure an appreciation of the role of the purchasing agent in 
the business organization as a whole (Selections 34, 39-41). 

PROBLEMS 

1. "The principal elements of a purchase are: (1) specification of what is 
wanted; (2) requisition for a specific quantity; (3) official sanction for 
the purchase; (4) obtaining bids, with or without samples; (5) accept- 
ing bid and ordering; (6) receipt of purchase, with or without examina- 
tion or test; (7) checking, passing, and paying invoice; (8) entry of 
purchase invoice in appropriate journal form." Who handles each of 
these in a business organization ? 

2. "Close buying is less important than intelligent buying and handling." 
Explain. 

3. "Time is sometimes of greater moment than either price or quality." 
Explain, and enumerate some such occasions. 

4. "Not only must the cost of the supply itself be taken into account; 
the cost of placing the supply in operation is also a factor in the situa- 
tion." What would the latter cost involve ? 



364 BUSINESS ADMINISTRATION 

5. "Successful purchasing is not a question of picking the lowest bidder, 
but of carefully comparing values." What does this involve ? 

6. "The modern tendency to replace rule of thumb in management by 
foresight and exact measurement has developed the use of specifica- 
tions." What is a specification ? How is it made ? By whom ? Should 
the purchasing agent take part in the preparation of specifications ? 

7. Enumerate the advantages (a) to the buyer, (b) to the seller, of buy- 
ing by specifications. Can specifications be used for all purchases ? 

8. "A rational specification crystallizes buying policy at many points. 
It states, for instance, the method of sampling, tells how much material 
one sample shall represent, prescribes methods of testing, either in 
whole or in part, the size of the test samples, and how to forward 
samples." Can you think of anything else that should be included? 

q. "The use of standard specifications is comparatively common; the 
proper following up of these specifications is comparatively common; 
comparatively rare." What is the inevitable result of such conditions ? 
How should proper inspection be made ? 

10. "In the placing of a large order, the credit rating of the seller is as 
important as that of the buyer." Why? 

11. What are the advantages to buyer and seller of the following terms of 
purchase: (a) single contract for one lot; (b) periodic deliveries of at 
agreed prices; (c) periodic deliveries at prices current at time of con- 
tract; (d) deliveries at the then prices between fixed limits; (e) de- 
liveries at cost plus an agreed per centum. 

12. What determines the choice of purchasing policies (a) as between 
dealing primarily with a few houses in each line, or shopping the entire 
market; (6) as between purchasing regulaily from certain suppliers or 
changing about; (c) as between placing an order entire, or splitting it 
into small parts; (d) as between buying from jobbers or from manu- 
facturers ? 

13. "The shrewd buyer must look beyond the mere price and must reach 
into the causes which have made the price, and those that are material 
to its remaining at that point, or in causing its fluctuation up or down." 
Where will he get this information ? 

14. How far is it a part of the purchaser's problem to have access to the 
following records of stores and production departments: (1) materials 
disbursed; (2) balance of each kind of material on hand; (3) materials 
required for present and future production orders; (4) condition of 
stock on hand; (5) performance records of various materials? 

15. Is it just as possible to err in setting quality standards too high as it is 
in setting them too low ? If so, is it as serious an error ? 

16. In what specific ways is the purchasing department connected with the 
following departments: accounting and cost, sales, stores, designing 
and engineering, production, financial, legal ? 



THE ADMINISTRATION OF MARKET PROBLEMS 365 

17. Distinguish stock and stores. 

18. "The stores problem is in essence a problem of stores control." 
Explain. What do you understand by control of stores ? Is it paper 
control, safe-keeping, or something else ? 

19. What are the consequences of excess of stores beyond reasonable pro- 
vision? What of a deficit of stores? How can over-investment in 
stores be prevented ? 

20. What items enter into a decision concerning how much stock to keep 
on hand ? What variables may upset the calculation of stock limits ? 

21. "Stocks and stores are reserves for contingencies. They provide 
elasticity in manufacturing operations and this elasticity is frequently 
better carried by them than by some other phase of manufacturing 
operations." Explain. 

22. "In deciding almost any problem of whether to buy or to make, cer- 
tain advantages will suggest buying and others home manufacture." 
What considerations are at stake ? 

23. As you think back over the preceding questions, what are the requisite 
natural qualities and the desirable training and experience of a pur- 
chasing officer ? 

24. What do you think of the organization plan of a large manufacturing 
and selling business which provides for a vice-president in charge of 
marketing and places under his charge purchases, traffic, sales and 
advertising ? Wherein is the plan good ? Wherein defective ? 

25. Draw up an outline of the main points in this section. 

34. THE FUNCTIONS OF THE PURCHASING 
DEPARTMENT 1 

There are really three main divisions of the work connected with 
purchasing, these being: 

1. Information, which includes: 

a) Obtaining information as to sources of supply 

b) Recording data of past purchases 

c) Recording prices and quotations 

d) Keeping results of inspections and tests 

e) Maximum and minimum quantities and future needs 

2. Purchases, which is subdivided into: 

a) Work connected with requisition 

b) Obtaining quotations 

c) Placing orders and following up 

1 Adapted by permission from H. B. Twyford, Purchasing Its Economic 
Aspects and Proper Methods, pp. 41 ff. (New York: D. Van Nostrand Com- 
pany, IQIQ.) 



366 BUSINESS ADMINISTRATION 

3. Invoices, which is subdivided into: 

a) Recording and checking with order 

b) Checking prices, classifying, etc. 

c) Approving and passing to accountants 

There is other work which is in some cases included in purchasing 
department, and in others is entirely separate. This work is con- 
nected with: 

4. Traffic, which is subdivided into: 

a) Seeing that shipments are properly classified 

b) Seeing that correct freight rates are obtained 

c) Seeing that no delays occur in transit 

d) Getting quick adjustment of claims 

5. Inspection, which includes: 

a) Inspection of material before or on arrival 

b) Making physical and chemical tests 

c) Reports on material in shop and in the finished products 

6. Stores, which is subdivided into: 

a) Receiving material and supplies 

b) Storing in secure and proper places 

c) Delivering for consumption as needed 

d) Keeping proper and reliable accounts 



THE ADMINISTRATION OF MARKET PROBLEMS 



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37© BUSINESS ADMINISTRATION 

36. MEASURING AIDS: TESTING IN CONNECTION 
WITH PURCHASING 1 

[This selection should be read not to understand the work of the 
National Bureau of Standards but to get an appreciation of what is 
possible in the way of testing materials, and to see an agency which 
makes for ever greater standardization. It is not easy to over- 
estimate the importance of "setting standards."] 

• 
Any purchasing agent can have for the asking, as one might say, 

the benefit of the tests and try-outs made by the world's largest single 
purchaser of equipment and supplies. Probably there is not a pur- 
chasing agent who lacks such facilities but has sighed now and then 
for a testing laboratory of his own wherein to make practical and 
scientific demonstrations of the quality of this commodity or that 
before contracting for a year's supply. 

The testing of materials was a newly-created governmental func- 
tion which was assigned to the Bureau of Standards by Congress 
when the institution was established in 1901. Naturally, the first 
duty of the Bureau is to make tests of materials for the benefit of the 
various governmental purchasing agents who may call upon it for 
advice, but the Bureau also conducts each year thousands of tests for 
purchasing agents and other interests outside the government service. 
Merely a nominal fee is charged in each instance for private tests, but 
the purchasing agent who is loath to go to any expense whatever on 
this score can, by keeping in touch with Bureau activities, garner no 
end of information that will aid him in his buying. Uncle Sam buys 
pretty nearly every commodity under the sun, and thus, sooner or 
later, the government is likely to make on its own hook a scientific 
try-out of everything on the average purchasing agent's shopping list. 

The policy whereby the National Bureau of Standards continually 
takes stock of the best the market affords works to the advantage 
now and then of the average purchasing agent in the commercial field, 
even though he may not have asked for advice or assistance — even 
if he is ignorant of the very existence of the Bureau of Standards. To 
see how this works out let us take a concrete case. The United 
States government purchases each year a total of not less than one 
million incandescent electric lamps. In order to ascertain exactly 
what the Federal purchasing agents were getting for their money 
there was fitted up at the National Bureau of Standards a "light test 

Adapted by permission from Waldon Fawcett, "The National Bureau of 
Standards," in the Purchasing Agent, I (1915), 101-5. 



THE ADMINISTRATION OF MARKET PROBLEMS 371 

room" in which every year more than 5,000 bulbs are burned out in 
"life tests" that show conclusively whether lamps, as they come 
from the factory, are actually giving the proper amount of light, that 
they do not require too much current to yield this illumination, and 
that they have in each instance the requisite life of practically 1,000 
hours. And how does this benefit the purchasing agent who does 
not get his electric lamps under a government contract ? Simply by 
keying up the manufacturers to higher standards of excellence. 

Latterly the whole policy of the National Bureau of Standards 
has been to seek to induce manufacturers and producers to give 
quality because quality pays, and not merely through fear of a rejec- 
tion of the goods. 

It may interest purchasing agents in general to know that the 
director of the Standards Bureau is # not at all a believer in the practice 
of purchasing "by sample." He declares that it is "a makeshift of 
the poorest sort" and should be resorted to only "in the absence of 
definite and reliable specifications in terms of measurable properties." 

Standards of quality are not, however, the only exactions that 
loom large before the purchasing agent. Standards of performance 
are in their way just as important, and consequently we find the 
Bureau of Standards performing missionary work of distinct value to 
the whole purchasing fraternity in its effort to have the performance 
of every instrument, device, or machine guaranteed in terms which 
are correct and susceptible of measurement. The Bureau experts 
take the ground that any specification is useless unless it be not only 
based upon correct mechanical and scientific principles but also 
embodies a statement of the precise method to be used in ascertaining 
whether the specifications or guarantees have been complied with. 
The Bureau officials feel that they will have accomplished something 
well worth while if they can bring about such understanding, by all 
parties, of the quantities to be measured and the method to be used 
that there will be no room for disputes between contractors or manu- 
facturers on the one hand and purchasers on the other. 

37. MEASURING AIDS: A SAMPLE SPECIFICATION 1 

GENERAL SPECIFICATIONS FOR SECTIONAL FILE CASES, BOOKCASES, 

TRAYS, AND CABINETS 

Workmanship and material. — All workmanship must be the best 
known to the trade; all material must be the best of the kind specified. 

1 Taken from one of the pamphlets issued by the General Supply Committee, 
United States Government. 



372 BUSINESS ADMINISTRATION 

Lumber. — Lumber must be bright and harmonious in color, 
thoroughly air-seasoned, properly kiln-dried, and free from knots, 
shakes, sap, discolorations, or other defects. Quartered white oak 
must be strictly white oak, no part of any piece to have the medullary 
ray at a greater angle than 45 to the quartered face, and all pieces 
in any one article must be well matched in color, figure, and grain. 
All exterior surfaces on articles specified as quartered oak must show 
strictly white oak, edges of stiles on face of case to be veneered, and 
legs of sanitary bases to be built up with interlocking joint to show 
quartered face on four sides. 

Poplar, ash, chestnut, beech, or birch may be used for all interior 
framing. 

Construction. — Framing to be by mortise and tenon or dovetail, 
as may be most suitable. Mortises must be as deep as possible, 
tenons full depth, and not less than one- third the thickness of the 
material. 

Dovetail must extend full width of the joint and must be finished 
flush and show no openings. 

Joints must be true and perfect, well glued throughout, and held 
under pressure until glue has set. Best Irish glue must be used and 
must not be used after reheating has affected its strength. 

All moldings to be worked on solid wood; no moldings, except 
glass beads, to be nailed on. 

All ends to be paneled. 

All base sections must have glue blocks at angle of rail and leg, 
to run full width of rail and of ample thickness, to be of hardwood and 
well glued. 

Each section to have frame at top and bottom of interior, with 
at least three rails in frame, grooved to accept three-ply panel inclos- 
ing top and bottom of sections. 

Exteriors and partitions to be secured to the frames by dado or 
dovetail construction, well glued and nailed. : 

Backs to be three-ply, exterior ply to be beech, birch, or quarter- 
sawed red gum, except when finished backs are ordered, when exterior 
ply shall match the wood used in sides of section, finish veneer to be 
not less than i\ inch thick when laid. Ends to be rabbeted to back, 
and back to be securely glued and nailed to ends and interior frames 
with cement-coated nails. 

All partitions to be solid, face edge to be lipped to match the rest 
of the unit; partitions and rails to finish flush on front of section. 



THE ADMINISTRATION OF MARKET PROBLEMS 373 

FINISH 

Preparation. — All surfaces must be smooth, and those to be 
varnished, except unexposed surfaces, must be made perfectly smooth 
by scraping and sandpapering. Any article which shows dark spots 
due to filler sticking to surfaces not properly smoothed may be 
rejected. The use of putty is prohibited except in nail holes. 

Materials. — Stain and filler must not cloud the grain and must 
leave the flake in quartered oak as clear as possible. Shellac must be 
white shellac cut in grain alcohol. Varnish must be an approved 
brand of standard manufacture and free from rosin; samples of 
varnish to be submitted. 

Colors. — Samples of standard oak and mahogany colors and finish 
may be seen at the office of the General Supply Committee. 

Standard finish. — Hardwood exteriors to be stained, thoroughly 
rilled to an even color, the filler thoroughly cleaned up, allowed to set, 
given one coat of shellac, sandpapered smooth, and three coats of 
varnish, each allowed to dry hard and be sandpapered smooth before 
the next coat is applied, the last coat to be rubbed with pumice and 
oil to a semidead gloss. No gum runs will be allowed. 

Interiors of all articles, including drawers and pigeonholes, except 
surfaces to be lubricated, must have one coat of shellac and one coat of 
varnish. The front edges of shelves and division pieces under J inch 
thick must match the exterior in color and receive the same finish as 
exterior. Drawer sides and runs to be lubricated with paraffin oil. 
Panels must be stained and rilled before setting. Interior of doors 
to be rubbed, same as exterior, after last coat. 

Unexposed parts. — Tops, bottoms, backs, and all unexposed parts, 
except drawer sides and runs, which can be reached after assembling, 
to have one coat of shellac and one coat of varnish. 

Interior of bookcase sections to be stained, and to receive one coat 
of shellac and one coat of varnish. 

Sides, backs, and bottoms of drawers when made of metal to be 
finished with baked enamel, guaranteed against rust. 

Hardware. — Pulls, label holders, rod fronts, handles, etc ; are to 
be solid cast bronze, brush finish, to match hardware on cases in the 
office of the General Supply Committee. 



374 BUSINESS ADMINISTRATION 

38. PURCHASE AND STORES UNDER UNSYSTEMATIZED, 

SYSTEMATIZED, AND SCIENTIFIC 

MANAGEMENT 1 

[This selection should be read not only to get information con- 
cerning purchasing and storing but also to get a flavor of the meaning 
of the term scientific management.] 

1. The purchasing of materials, stock, and miscellaneous supplies 
under unsystematized management may be done by one man or by 
a purchasing department; but more likely this duty is not very well 
denned and the purchasing is done by a number of persons, especially 
those needing the material. Little study is put on the standardiza- 
tion of materials, and different kinds of stock for the same use are 
often bought. This tends to remnants on some kinds, overstock and 
understock on others. The buying is seldom done on exact specifica- 
tions, is not always even by written order, nor is there a predeter- 
mined maximum and minimum established of each article that should 
be carried in stock. The head of the business or the buyer may be 
an exceedingly shrewd trader and may buy very close at times; but 
he will not always buy the materials best suited to the work, often 
overbuys or underbuys for lack of definite information, and is fre- 
quently tempted by bargain lots that seem cheap but may cost more 
to use in the shop. 

The lack of well-organized purchasing results in work progressing 
to a certain extent through the shop until it is stopped and occupies 
space waiting for some material which has been overlooked, or which 
is not suited for the purpose. A fairly successful publishing house 
in one of our large cities does its buying by the unsystematized fashion. 
Last year in making up its statement of profit and loss, the inventory 
of paper amounted to $20,000. Three-fourths of this paper exists 
as overruns, or odds and ends of lots which are stored in various 
printing offices and cannot be used on an average-sized job. They 
are so scattered they cannot be combined, and the make, color, finish, 
and size are different in nearly all the lots. When this house realizes 
what this stock is, it will be forced to write off nearly $15,000 from its 
books on what it now considers good assets. 

The storage of materials and purchasing are very closely related 
to each other, Loss of time hunting for material is the same, whether 

1 Taken from H-. P. Kendall, "Unsystematized, Systematized, and Scientific 
Management," in Proceedings of the Tuck School Conference (191 2). 



THE ADMINISTRATION OF MARKET PROBLEMS 375 

the material is lost in the storeroom or has not been purchased, and 
a lack of system in one department will undo attempts at system 
in the others. The effect of badly organized stores is: (1) Loss of 
time; work which should go through the manufacturing department 
rapidly is held up at different places waiting for materials of the 
proper kind or amount, and this is a direct loss. (2) Loss of space; 
more space is required to hold stores in an unsystematized way, and 
for lack of standardization more stores will be kept on hand than are 
required. Space is also lost in the workroom because work in process 
does not pass promptly through the workrooms if delayed for material. 
(3) Loss of capital, because more money is tied up in stores which 
are not systematized and properly regulated, and more money is 
tied up in the jobs which represent labor and material sidetracked 
throughout the plant. 

2. In a systematized plant, materials and supplies are purchased 
through one man or department, a maximum and minimum generally 
established, and a decided effort made to purchase the materials best 
suited to the workrooms. Some analytic methods are used in deter- 
mining the proper materials, and standardizing is done on the more 
important kinds. This purchasing department aims to have a stock 
of everything required, but buys largely what it is asked to. It does 
not always make purchases on complete specifications, and a lack of 
complete standardization increases the detail of that department. 
So far as the clerical system is developed, however, it is generally 
quite good. 

A marked contrast to the storage methods of the unsystematized 
plant will be seen at once. Here is an adequate room in charge of a 
storekeeper who issues stores only on requisitions, and is expected 
to keep his place neat and orderly and deliver his stores on call. A 
perpetual list is kept in the office and balanced with the stores, and 
the balance is proved by an actual count of the stores once a year 
or oftener. Stores are partially classified and standardized to some 
extent. It is only the most-used stores that are assigned to orders 
before actually called for. The physical handling of the stores, mov- 
ing them in and out of the storeroom, is done by the assistants of the 
storekeeper, and the efficiency of this work and the orderliness of 
the department depend wholly upon the kind of man in charge. 
The central office can exercise very little real control in this depart- 
ment. 



376 BUSINESS ADMINISTRATION 

Not all systematized plants control work from a central planning 
station by writing the operations for each process before the work 
is started; therefore materials are not exactly pre-determined and 
work is still likely to be started before it is discovered that some 
material is lacking. Neither are the quantities always kept up 
automatically through the purchasing department by a predeter- 
mined maximum and minimum of each kind. Also, it is general 
practice to have storage space for different departments, some of 
which are not under control of the office; for instance the miscel- 
laneous supplies used for the power department for repairs, piping 
and plumbing, electrical maintenance, etc., may be scattered about 
with little idea of order, while the actual materials for use in manu- 
facture may be in good order. 

3. Scientific management is not satisfied merely to have plenty of 
materials on hand when wanted, to roughly standardize the principal 
items of stock used, and to buy at the market rate, but demands that 
all materials be carefully studied with reference to: (1) the greatest 
adaptability to the work; (2) quality and uniformity; (3) price; 
(4) determination of the proper maximum and minimum that shall 
be carried, so that the stores department may automatically govern 
materials and supplies which should always be on hand. 

When this has been done, care is taken to make all purchases on 
detailed specifications. The importance of using materials best 
suited to the work, and which are uniform in quality and by stand- 
ardization reduced to the smallest variety, is not sufficiently appre- 
ciated by the buyer in even the systematized plant. 

For example, a manufacturer of razors using a thin blade could 
not secure a steel which would always act alike and produce a uniform 
result with uniform treatment. He employed a steel expert of reputa- 
tion to assist him. This expert purchased the best razors that dif- 
ferent barbers had, analyzed them chemically and microscopically 
and, as every man who uses a razor might guess, found very great 
variation even in the same makes. In fact, he satisfied himself that 
no razor manufacturer, however well systematized his plant was, 
had ever scientifically determined the best steel, or had purchased it 
on a formula that would standardize this material. As a result, all 
these years the buying of a razor had been a lottery. 

After many tests this expert secured from various steel manu- 
facturers samples of steel on their formulae and his own, and he 



THE ADMINISTRATION OF MARKET PROBLEMS 377 

finally developed a formula that would give the best razor steel known 
and maintain it uniform. As a result of this method of buying, this 
manufacturer stood alone among the razor producers of the country 
in ability to produce razor blades of standard quality. 

Another illustration of the standardizing of materials. In study- 
ing the supplies of a business it was found that there were twelve 
kinds of wrapping paper regularly used, and an investment of $2,500 
was needed to carry a sufficient amount. This was standardized and 
now the twelve kinds of paper have been reduced to four, with a 
saving of $1,000 in the stock, 60 per cent in the storage space occupied, 
and the available worth of this paper for the demands that may be 
made on it is 20 per cent more than what it was formerly. This 
illustrates the saving made on but one class of material used in a 
factory where standardization is being worked out. 

Such methods of purchasing compel the purchasing department 
to be intimately associated with the working of the materials through 
manufacture, and result in the following: (1) uniform material best 
adapted to the work saves labor and delay in workrooms; (2) mini- 
mum of kinds and sizes necessary to be carried; (3) storage space 
saved; (4) lower costs through buying in larger lots. 

The physical aspects of a storeroom under scientific management 
do not differ greatly from those in the systematized. A proper means 
of holding or piling the stores, laid out in an orderly fashion, is pro- 
vided. To avoid confusion in a varied terminology, mnemonic 
symbols are used to designate the different kinds of stores. The 
maximum and minimum mentioned above are determined for each 
kind, and kept on the ledger sheets in the central planning room. The 
bookkeeping for the stores is not carried on in the storeroom, the 
storeroom force simply acting on orders. The location of the materials 
is also indicated on the ledger sheets, or, as they are known, the 
balance of stores sheets. 

Under scientific management it is not sufficient, when materials 
are required, to send a requisition to the stores department, but all 
orders or work which require material have the items looked up and 
assigned to the specific orders by the balance of stores clerks, and this 
material when assigned to a given order is not available for another 
order which may follow. This is done before the materials are 
required for use, and this method serves as advance warning to the 
stores clerks if an unexpected demand for a particular material is 
likely to occur. Quick action is then possible in purchasing more. 



378 BUSINESS ADMINISTRATION 

The work of moving materials into the stores department and 
moving them from the stores department to the particular place 
where they are to be used becomes a function of the planning of the 
work, and of the routing of the work, and the workman who is to 
use them should not be delayed or have to give a thought to the 
materials which he needs for his next job. They are moved in the 
right condition for his use to the point where he can use them to 
the best advantage. The time which the workman spends looking for 
or waiting for his materials can be better spent in effective work. 

39. THE INTERDEPENDENCE OF PURCHASING WITH 
OTHER FUNCTIONS 1 

[This selection is particularly helpful in showing the inter- 
dependence of business problems. Do " lines of authority" and 
"lines of communication" need to coincide in a business organiza- 
tion ?] 

Let us consider separately, but briefly, and mainly in outline and 
in a suggestive way, the relation of the purchasing department to 
the other departments and functions of the business. 

Management. — Most authorities on factory organization make 
the purchasing department responsible and accountable directly to 
the general manager. Certainly it is important that the purchasing 
department report direct and keep the management fully informed 
as to conditions affecting costs and the operation of the plant. The 
connection of the purchasing department to the management should 
be so close and so intimate that this department can be the first to 
respond to any changes of plans or policy affecting rate of production 
or changes in types or classes of the product of the factory. Failure 
here is almost fatal, and yet how often do we find the manufacturing 
departments putting forth their best efforts to increase output by 
means of an increased force or longer working hours while, as yet, 
little or no effort has been made to prepare for the increased demand 
on the supply of raw material ? 

Or again, how often do we find the normal supply of material 
continues to come in after men have been laid off or hours shortened 
in an effort to reduce the rate of production in keeping with a falling-off 
in demand for finished product ? 

1 Adapted by permission from A. C. Ward, "The Purchasing Department of a 
Manufacturing Organization," in The Engineering Magazine, XLVI (1913), 349-54. 



THE ADMINISTRATION OF MARKET PROBLEMS 379 

Accounting and cost. — It is important that the work of the pur- 
chasing department should be so planned that invoices may be checked 
as to prices, quality, and quantity of the goods covered, and then 
passed promptly to the accounting department. All essential informa- 
tion regarding discounts, rebates, transportation, and claims of various 
kinds should also be promptly and clearly furnished in connection with 
the invoices. The purchasing department, on the other hand, should 
be kept fully informed as to any disputes or misunderstandings 
arising in settlements of accounts, or anything of that nature which 
might affect the relationship or attitude of those furnishing material 
and supplies. 

Sales and order departments. — It is advisable that the purchasing 
department keep in close touch with new business and with the 
general trend of inquiries and prospects, both as to the effect on the 
volume of business and as to the relative demand for different sizes 
and types of product. To provide this information, some provision 
should be made for the purchasing department to have a summary 
or classified survey of sales orders as they are entered, together with 
a statement of inquiries and prospects so far as they are special in 
quantity or types. The method of accomplishing this will depend upon 
the nature of the business and the peculiarities of the local organization. 

Receiving and stores department. — The relation between purchasing 
on the one hand and storing material and delivering it where and 
when needed, on the other, is so intimate that it is usually thought 
advisable that stores be directly under the authority and management 
of the purchasing department, or, at least, that the purchasing 
department audit all requisitions and have final jurisdiction as to 
quantities, etc., carried. 

The storekeeper should have complete copies of all purchase 
orders, except that portion of the order pertaining to prices, terms, 
etc., and should be kept fully informed as to prospective deliveries, 
delays, cancellations, changes, etc. 

There should be the closest co-operation and the best possible 
understanding between the purchasing department and the store- 
keepers as to quantities to be carried, policies of retrenchment or 
advancement, disposition of obsolete and surplus stock, etc. Store- 
keepers should also be taught to study and classify the needs and 
demands for the different classes of material carried, so as to combine 
requisitions and anticipate needs and thus facilitate placing all pur- 
chase orders to the best possible advantage. 



380 BUSINESS ADMINISTRATION 

Designing and engineering. — Perhaps there is no phase of this 
subject presenting greater possibilities or providing more food for 
thought or more opportunities for profitable action than this of the 
relation of those who specify and those who provide the material 
entering into the complete product of the organization. The knowl- 
edge, experience, and facilities of the purchasing department as to 
quality, cost, availability, etc., of different materials should always 
be at the command of the designing and engineering departments, 
and should be freely used in designing new product or re-designing 
old lines. The relations of these departments should be so cordial 
and intimate that the purchasing department will be freely consulted 
on all such matters and be assured a voice in the final approval of all 
such designs and changes. Certainly, the specifications, when issued, 
should leave as wide a margin or latitude as possible to the discretion 
and judgment of the purchasing department in regard to the particular 
grade, quality, form, and source of supply of the material used. To 
this end, the purchasing department should possess a practical knowl- 
edge of the equipment, processes, methods, and requirements of the 
manufacturing departments, and be guided by this as well as a knowl- 
edge of the comparative availability, prices, etc., of material offered 
by different sources of supply. 

Production order and manufacturing. — The purchasing depart- 
ment, either directly or through the stores department, should be the 
first notified of new work being contemplated or actually placed in 
the shop. Such notification should include or be accompanied by a 
complete list of material and parts required. So far as possible, time 
should be given to procure all needed .material and supplies before 
work is actually begun. 

The manufacturing officials and departments interested should 
be kept fully advised by the purchasing department in regard to any 
failure or delays in getting necessary material or parts, or any other 
conditions arising within the jurisdiction of the purchasing depart- 
ment which may in any way affect the progress of work in these 
departments. 

I believe it is desirable that the purchasing department be in 
position to follow the progress of the material through the various 
stages and operations in the factory and to know at first hand of its 
suitableness for the conditions and work required. This knowledge 
is one of the essential requisites to successful and satisfactory pur- 
chasing of material for a manufacturing institution. 



THE ADMINISTRATION OF MARKET PROBLEMS 381 

40. A POSSIBLE PURCHASE DEPARTMENT 
ORGANIZATION 1 

The organization of the purchasing department will depend 
not only on the amount of yearly purchases but on the nature of the 
business as well. One man can purchase a tremendous quantity if 
the purchases be made in large lots, or if the variety of articles pur- 
chased be small. One man can purchase more from the dollar and cents 
standpoint if he deals, say, in coal only than the man who buys for 
a chain of five- and ten-cent stores. Not only can he buy more, but 
he will need less assistance in following up the orders after they are 
placed to see that they are shipped in time and come up to specifica- 
tions. Detail takes time, and where there is detail there are required 
more hands to take care of it properly. 

The buyer for a contracting company which maintains practically 
no storage facilities will require a purchasing department differing 
from that required by a corporation with a warehouse and which uses 
the same variety of articles year in and year out, since the latter can 
judge its needs sufficiently in advance to stock them. The detail 
involved in one case may be the same as in the other, but the con- 
tractor usually wants deliveries promptly, and rush orders require 
more attention than routine orders. 

Some businesses have very marked rush and dull seasons, the 
buying for the entire year being done during one season. Obviously 
such a concern could not maintain an elaborate purchasing depart- 
ment during the dull season even though it were highly efficient 
during the busy period. In fact, any department of any business 
should be so designed that it can be expanded or contracted in con- 
formity with the volume of business to be transacted. 

Some businesses are so highly specialized that no one purchasing 
department can be organized to do all of the buying. Each purchase 
may require the skill and judgment of an expert. Knowledge of 
the salability of an article may be paramount. It may be impossible 
to impart to a central purchasing agent, on paper, full information. 
In such cases each department of the business should do its own 
buying and there will be no need of a central purchasing department. 

From the foregoing it is not hard to understand that it is impossible 
to lay out a purchasing department that will fit any business unless 
the nature and size of that business be known in advance, any more 

1 Adapted by permission from C. S. Rindsfoos, Purchasing, pp. 80-84. 
(McGraw-Hill Book Company, 1915.) 



382 



BUSINESS ADMINISTRATION 



than one could design a light and power plant for a municipality 
without first knowing the size and nature of the municipality. How- 
ever, it is possible to set down the lines of good standard practice and 
this may serve as the suggestive basis on which to work in any specific 
case. 

It will be the duty of the general purchasing agent to take care of 
the general management and supervision of his department. A large 
part of his time will be taken in the negotiation of large orders or 
contracts, particularly when they reach the closing stages. He will 
formulate the policies which his department is to pursue, seeing that 



Incoming^ 
Requisitions 




General Purchasing Agent 
Assistant Purchasing Agent 




Outgoing 
Orders 


Unapprov 


;d Invoices 


Approved Invoices 










1 


Transportation 
Clerk 




Chief Clerk 




Branch 
Purchasing Agents 


























1 


Stenographers 

Telephone Operator 

Office Boys 




Price Clerk 




Bookkeepers 


1 
























i 


Clerks for Tabulating 
and Filing Quotations 




Miscellaneous 




Clerks for Filing 
Catalogs, Correspond- 
ence, etc. 



it accords with the general policy of the corporation which he repre- 
sents. He will represent his department in consultations with the 
executive heads of the other departments, such as the accounting 
department, auditing department, construction department, contract 
department, etc. All differences which arise between his depart- 
ment and another will be for his consideration. He will often indicate 
to his chief clerk the sellers from whom he wishes bids on a given 
requisition, and he will keep a general oversight of the progress of 
orders of special importance, even after they are placed. In short, 
he will be the responsible head, mainspring and inspiration of his 
department. 

The assistant purchasing agent will assist the general purchasing 
agent in whatever way he may be instructed. It is usual for the 



THE ADMINISTRATION OF MARKET PROBLEMS 383 

assistant purchasing agent to take as much of the detail off the 
shoulders of the general agent as practicable. He will usually examine 
all correspondence intended for his superior, bringing to his attention 
only such as is most important. In fact he will ordinarily handle all 
the routine matters so that his superior will have a large part of his 
time free for consultation. 

The chief clerk will report to the general or assistant purchasing 
agent, and be responsible for all the clerical work of the purchasing 
department. In many cases he will determine who shall bid and send 
out the requests for tenders. Much of the routine correspondence 
relating to bids, prices, etc., will be handled by him either direct or 
in the general purchasing agent's name. He will be responsible for 
the discipline of the department. In the absence of both the general 
and assistant purchasing agents he will act as the executive of the 
department. 

The duties of the price clerk will consist primarily in maintaining 
accurate and up-to-date price records, checking invoices for material 
delivered to see that same are correct as to price (although this is 
often done in the accounting department), examining tabulated bids 
to see that the prices are in line with the market, and in general super- 
vising the riling of all papers. 

It will be the duty of the transportation clerk to keep posted on 
freight rates, to examine freight charges, and to prepare claims for 
overcharges. He will also watch orders after they are placed to see 
that they are shipped promptly and not delayed in transit. This is 
frequently a very important service. 

The inspection and testing of materials either during manufacture 
or after delivery will usually be under the engineering department, and 
not the purchasing department. The purchasing agent, however, 
will furnish the engineering department with a copy of the order and 
specifications in order that the engineering department may know 
what it is entitled to demand of the manufacturer or seller. If, 
however, the business does not include an engineering department, 
the inspecting and testing should be under the purchasing depart- 
ment, in which case the inspector should report to the general or 
assistant purchasing agent direct. 



384 



BUSINESS ADMINISTRATION 



41. 



ORGANIZATION OF GENERAL PURCHASING DEPART- 
MENT OF WESTERN ELECTRIC COMPANY 







VKEFREStDEM 

IN CHARGE 

OF PURCHASES 

ALSlll 








110 


EMP 










GENERAL 

PURCHASING ACENT 

IY.FBmOm 










106 


EMP 












. 




















HAWTHORNE BRANCH 

ASSISTANT GENERAL 

PURCHASING AGENT 

F.GAustin 




PURCHASING 
ENGINEER 
P.M.Mjnhlll 






NEW YORK BRANCH 

GENERAL PURCHASING 

AGENT 

W.F.Bjncler 




GENfURCH'G COMMITTEE 

*FBj«Hr 

CAMtmTI 

FCAiiHi. 

M A.0tcrian4ir 

P.M MjnM.SECY 




17 


EMP. 






5 EMP 








80 


EMP 






1 






































CUBICAL t 
SERVICE DIVISION 

Rltcoftn 
CHIEF OF DIVISION 




BUYING DIVISION 

F.CAMtin 




BY-PRODUCTS 
SALES 

K.E Su'Jttrm* 




CUYmGDtVrSION 
VCFBjrtcter 




ELECTRICAL SUPPLIES 
BUYING DIVISION 

M.AOt»rlJnd(l 




CLERICAL ( SERVICE 

DIVISION 
ASSISTANT GENERAL 

PURCHASING AC MT 

CAMmgi 














































1 






1 














1 








1 










SUPPLIES-PAPER 

TIMBER PRODUCTS 

H.I.Gwdire 

BUYER 






CHEMICALS.GUMS, 

OILS.PAINTS 

E.I.Guj 

BUYER 




HETALS.MACHINERY 

MACHINE TOOLS 

R.H.Kiuub 

BUYER 




TEKTILES.GUMS. 

OILS.CHEMKALS 

1 M Hunt 

BUYER 




CUBICAL SECTION 
CHIEF CLERK 

A.F.S0UU1 






SERVICE SECTION 
SERVICE MANAGER 

Al.Smim 






































5 




1 








1 












METALS-FERROUS 

« PRODUCTS 

I.SBjsMtl 

BUYER 




METALS-NON FERROUS 
WIRE VEHICLES 

BUYER 




MICA 

MIO> PRODUCTS 

P.MMjbIijII 

BUYER 




WIRE CABLE 
» STRAND 

CA.Memll 

BUYER 




OISTRIBUTINC HOUSE 
BUYING METHODS 

C.AMmill 




















































CHESTNUT (CYPRESS 
POLES 

H.P.Mlriliill 
BUYER 






PAPER I PRINTING 

OFFICE*. FACTORY SUPPLIES 

BEU SYSTEM STANDARDS 

AW.Grten.BIMR 






















1 










r 












f" 




1 








OROr« FILE 1 VOUCHERS 
P.T.CIuriton 




CHATTANOOGA 

WESTERN UNION ROUS 

FAGcntry 




E-lVjnNlltl 
BUYER 




F.C.MrlH 

EO Lonf 
BUYERS 


























1 












MEW YORK 

HBCritil 




BOSTON 
R.M Randolph 






















1 




' 






PHILADELPHIA 
F.H.Swlrll 




ATLANTA 

WPltmmon 




























1 








TIMBER PRODUCTS 
BUILDING MATERIAL 

VEHICLES 
•..H.Vorum.BUYcR 




BY-PRODUCTS SALES 
P.M.Mjrjhjn 
















C.E.W111M 
ASSISTANT 







REFERENCES FOR FURTHER STUDY 

Jones, The Administration of Industrial Enterprises, chaps, xvii-xx. 
Shaw, An Approach to Business Problems, chaps, viii-xvii. 
Cherington, The Elements of Marketing. 
Ivey, Principles of Marketing. 
Nystrom, Economics of Retailing. 
Twyford, Purchasing. 



CHAPTER V 
THE ADMINISTRATION OF FINANCE 

Purposes of this chapter: 

i. To see the outstanding tasks confronting the administrator in 
his relationship to finance. 

2. To understand the institutions, devices, and policies which he 
uses in meeting these tasks. 

3, To visualize the organization which may be set up to administer 
these financial relationships. 



The financial problems of the modern manager are both numerous 
and difficult to solve. Our minds are prepared to accept the first 
part of this statement quite readily. Our whole economic organiza- 
tion is on a pecuniary basis; business is a pecuniarily organized 
method of gratifying wants; it is quite natural, accordingly, that 
financial problems should arise at every turn of the manager's path. 

But business has been on this pecuniary basis a long time and 
we might well suppose that standard solutions had long since been 
secured for most financial problems. This is far from the case. A 
striking bit of evidence that much remains to be done in the financial 
aspects of management is shown by the following list of questions in 
business finance which (1920) require investigation according to the 
finance committee of the Boston Chamber of Commerce. "The 
student should read this list carefully as a means of surveying, 
through the eyes of business men, the unsettled problems in this 
field. 

1. Business barometers: what they show and what they fail to 
show. 

2. The relation of successful industrial finance to the business 
cycle. How can financial methods be put on a more scientific basis ? 

3. Can "financial standards" be established for operating the 
different types of industries? (This would involve a comparative 
analytic study of the various "ratios" to be derived from the financial 
statements, income and expense accounts, etc., over a period of years.) 

4. Is there a "standard" investment for the different types of 
manufacturing business? What size conduces to the greatest 
financial success, and what is the minimum safe investment? 

38s 



386 BUSINESS ADMINISTRATION 

5. What are the best methods of financing a small business? 
In what ways should the banks help such concerns ? 

6. How shall working capital be provided ? What should be its 
relation to fixed capital in different types of industry ? 

7. The seasonal element in different types of industries. What 
can be done to level the peaks and fill the valleys ? 

8. The possibilities of budget-making for business concerns. 

9. Financial co-operation between business concerns. 

10. When shall a business borrow from the bank and when 
through note brokers and commercial-paper houses ? 

11. What improvements can be suggested in the methods of 
arriving at the amount of the line of credit extended by banks to 
the different types of industries ? 

12. What proportion of the earnings shall be distributed and what 
proportion put back into the business ? 

13. Is there " over-competition " in the marketing of securities? 
If so, to what extent has it affected the cost of capital, and what 
measures can be taken to improve the situation ? 

14. The turnover of stock (or "working assets") in its relation 
to the financing and financial success of different types of manufac- 
turing concerns. 

15. How shall the periods of depression be financed? What 
rules should be followed (a) by the banks, (b) by the business concerns ? 

16. The abuses of commercial credit. 

17. To what extent can improved financial methods decrease 
business failures ? 

18. The theory and practice of the cash discount. 

19. The uses and limitations of the trade acceptance in different 
types of industry. 

20. The pros and cons of "no par value" stock. 

21. The proper relations between bonds and stock in industrial 
corporations. 

22. Rules for financial success in the foreign trade game. 

23. Profit-sharing from the point of view of industrial finance. 
Does it increase profits ? 

24. Will wider distribution of ownership of business concerns 
lead in the long run to greater profits ? To what extent is it desirable 
that employees and the public have a "vested right" in industry? 

25. What relations should exist between the ciedit and the sales 
department in various types of industry ? 

26. The financial aspects and results of advertising. 



THE ADMINISTRATION OF FINANCE 387 

27. Financial aspects of purchasing — particularly the financing 
of excess purchases of raw material at a low price through temporary 
borrowing. How far is it safe to go ? 

28. Better financial co-ordination between the sales and pro- 
duction departments. 

29. Possible financial advantages of more direct distribution of 
the product to consumers in certain types of industry. 

30. What are the greatest financial wastes in certain types of 
industry ? 

31. The effects of "blue sky" legislation on legitimate industrial 
finance. 

32. How can our bankruptcy law and procedure be improved? 

33. What changes in the federal tax laws will lead to greater 
business prosperity ? 

34. What effect would greater publicity of accounts have on 
business profits ? 

This list was not introduced into our discussion with any idea 
that it could wisely be used as the basis of our study. Its usefulness 
for our purpose is in the light it sheds on the attitude of practical 
business men toward financial problems. These men realize clearly 
enough that finanical problems are numerous, unsettled, and much 
interwoven with problems of marketing, production, social control, 
and all the other outstanding relationships of the manager. 

In our general survey of financial management we shall seek an 
understanding of the following matters: (1) the financial institutions 
which the manager can utilize; (2) the technical devices, such as 
corporate securities, accounting systems, and commercial credit 
instruments, which he finds convenient; and (3) the financial policies 
in terms of which he actually does utilize these institutions and 
devices. These items make up the subject-matter of the chapter, 
which will be presented in five sections. 

A. What it Means to Start and to Finance a Business, pages 

388-97. 

B. The Manager's Relationship to the Financial Organization 
of Society, pages 398-429. 

C. Financial Policies and Occasionally Used Devices, pages 
420-69. 

D. Financial Policies and Frequently Used Devices, pages 
469-512. 

E. Organization for Financial Administration, pages 512-22. 



388 BUSINESS ADMINISTRATION 

A. What It Means to Start and to Finance a Business 

From the veriest beginnings to the final disappearance of a busi- 
ness there is a continuous procession of financial problems. Of course 
there is. Business is engaged in, under our economic organization, 
with the hope of securing profits. Profits, the prime test of the suc- 
cess of an enterprise, are computed in financial terms as are also all 
costs and all incomes. Technology, labor, markets, risks, and all the 
other outstanding relationships of the manager are, consciously or 
unconsciously, translated by him into financial terms. 

Perhaps this is only another way of saying that financial issues 
are so pervasive in business administration that it is exceedingly 
difficult to find the beginning, end, or middle of the matter when one 
tries to arrange it for discussion purposes. Any arrangement is 
pretty certain to be arbitrary. One method of opening our dis- 
cussion is that of making a general survey of what it means to start 
a business; what the chief financial matters are which must be cared 
for at the outset; and what leading methods there are of providing 
finances thereafter. We shall make such a general survey in this 
present section which we are calling "What It Means to Start and 
Finance a Business." In later sections we shall try to go a little more 
deeply into the subject. 

PROBLEMS 

i. Notice the list of costs mentioned in Selection i as being connected 
with starting a business. Are they present when an individual pro- 
prietorship is formed ? All of them ? When a corporation is formed ? 
Always ? Will the funds of the business (whatever this may mean) 
need to be large enough to cover such items ? 

2. If I look over the situation and decide to open a grocery in a certain 
district, have I engaged in the promoter's function ? 

3. What classes of persons are likely to serve as promoters in our modern 
society ? 

4. Who would do the promoter's work in a socialist society? Would 
there be any need of such work ? 

5. What is the promoter's social function ? Does he play any part in 
the guidance of economic activity ? 

6. Compare as methods of financing a business, (a) borrowings, (b) gradual 
growth from reinvestment of earnings. What are the advantages and 
disadvantages of each method ? 

7. What should be the attitude of the financial manager toward invest- 
ments in side-lines ? Why ? 



THE ADMINISTRATION OF FINANCE 389 

8. "A manager who ' doesn't owe a dollar in the world' is not regarded as 
conducting his business upon approved lines." Explain. 

9. What are the chief forms of fixed capital ? 

ro. What factors must be considered in figuring the fixed capital require- 
ments ? 

11. "The chief forms of working capital are: (a) cash; (b) accounts and 
bills receivable; (c) finished stock; (d) raw stock and supplies; (e) se- 
curities of other companies held for investment, not for purposes of 
control." Are there deductions which should be made? 

12. "The volume of working capital depends upon the nature of the 
business, and it should be determined with reference to: (a) volume of 
business; (b) distribution of purchases throughout the year; (c) the 
credit terms upon which purchases are made; (d) the credit terms 
upon which sales are made; (e) the period of production during which 
capital is tied up in work in process." Show the bearing of each item. 
Should other items be included ? 

13. "A dealer may have too much capital in his business for his own 
good, just as he may have too little." What is the reason for this 
statement? Which would you regard as the better credit risk, the 
man with too much capital or the man with too little capital? 

14. How can you tell whether a business man has too much or too little 
capital ? What are the disadvantages of having too little capital ? 

15. Work back over the preceding questions, considering in the case of 
each whether it is applicable to (a) an individual proprietorship, or 
(b) a partnership, or (c) a corporation. 

1. STEPS INVOLVED IN STARTING A BUSINESS 1 

[The following selection has specific reference to the steps 
involved in starting a (corporate) gas plant business. It should be 
read, however, with the mind searching for the application of each 
point to other types of business. Most of the matters mentioned 
apply to the case of an individual proprietorship or a partnership as 
truly as they do' to a corporation. And they are by no means peculiar 
to the gas business.] 

The cost of a gas plant and of acquiring its business may be subdi- 
vided as follows: 

1. Preliminary development, which includes: 

a) Investigation of the project 

b) Assembling of parties who may be willing to participate 

1 Adapted by permission from C. \>. Gerstenberg, Materials of Corporation 
Finance, pp. 455-56. (Prentice-Hall, 19 15.) 



390 BUSINESS ADMINISTRATION 

c) Preliminary engineering and legal advice on the proposition 

d) Canvass of territory to ascertain if sufficient business can be 

obtained 

e) Estimate of cost of plant and probable income 
/) Incorporation of the company; and 

g) Securing the franchise 

2. Real estate 

3. Labor, materials, and sub-contracts 

4. General contractor's profit 

5. Engineering 

6. Expense of company organization during construction 

7. Interest during construction 

8. Taxes and insurance during construction 

9. Stores, supplies, and working capital 

10. Acquiring or establishing the business, which includes: 

a) Expenses of canvassing for business 

b) Advertising 

c) Setting meters free of charge 

d) Interest on cost of plant in excess of income until business 

becomes self-supporting; and 

e) Taxes and insurance during that time 

11. Legal expenses 

12. Financing, including banker's commission, discount on bonds, 

and promoter's profits 

Many of these items are overlooked by those who have had no 
experience in the actual establishment of such a business, and that, no 
doubt, is the reason why the cost of such a plant and establishing such 
a business almost always largely exceeds the anticipated outlay. 

2. PROMOTION AND THE PROMOTER 1 

The function of a promoter. — A promoter is a man who organizes 
a new business and sets it going. The business need not necessarily 
take the form of a corporation. It may be handled as a partnership 
or a joint-stock company. 

"Discovery" of a proposition. — A promoter in handling an enter- 
prise has three separate tasks before him. First, he must "discover" 
his proposition; second, he must "assemble" it; third, he must 
"finance" it. 

The discovery of a proposition does not mean simply to find it, 
but includes a thorough investigation into all the surrounding con- 

1 Adapted by permission from W. H. Lough, Corporation Finance, pp. 194-98, 
207-10. (Alexander Hamilton Institute, 19 16.) 



THE ADMINISTRATION OF FINANCE 391 

ditions, and the solution in advance of all the difficult problems that 
are likely to arise in its development. Let us suppose, for instance, 
that a new invention which looks good on the surface is brought to the 
attention of a promoter. If he understands his business he will 
first of all examine critically every point that points toward the 
invention's success or failure. He will find out whether it is patented 
and just what features the patent covers. Next, he will consider 
whether other devices are in use which perhaps accomplish the same 
purpose as well or nearly as well as the invention. After making 
sure that the invention is what it purports to be, he will consider the 
possible markets for the article. 

Next, the promoter takes up the cost of manufacturing. He finds 
out whether new and specially constructed machinery is necessary 
in manufacturing the invention, and whether any especial skill on 
the part of laborers is required. He considers the amount of experi- 
ment that will be necessary in order to perfect the invention and 
in addition figures a large amount of extra cost for unforeseen 
contingencies. 

These are only a few of the factors that the promoter would investi- 
gate before taking any further action. Their number is sufficient to 
indicate, however, that any promoter who has a reputation to make or 
preserve cannot afford to jump hastily at whatever proposition is 
presented to him. The process of discovery may take a long time, 
perhaps months or even years. 

"Assembling" a proposition. — By assembling a proposition is 
meant the process of getting temporary control into the hands of 
the promoter. If he is dealing with an invention, he assembles the 
proposition by getting an option on the invention or by making an 
agreement with the inventor on a royalty basis. In the case of a 
consolidation of plants or railroads into a new corporation, assem- 
bling is frequently much more complicated and difficult. In such a 
case the promoter may have to get options or arrange the terms of 
purchase with every plant and perhaps with all the different classes 
of security-holders involved. 

Financing a proposition. — Now we come to the most difficult 
part of the promoter's work, his financing of the new corporation. 
No hard and fast rules can be laid down to cover the promoter's 
procedure. 

We may classify the men who spend a considerable amount of their 
time and energy in promotion into four groups. Let it be clearly 



392 BUSINESS ADMINISTRATION 

understood, however, that this classification does not pretend to be 
complete. 

First come the professional promoters, the men who really do make 
it their main, and almost their sole, business to hunt for enterprises 
that promise profits and to finance those enterprises. This type is 
common in fiction, but rare in real life. So far as the writer recalls, 
he has met only one man who could be put in this class, a tall, lank, 
fervent individual with a persuasive air. 

The second class consists of lawyers and bankers in small com- 
munities. Such men have exceptional opportunities to inform them- 
selves as to local conditions; they frequently take hold of some local 
enterprise, such as a steam or street railway, secure the assistance 
of experts for investigation, and carry through the proposition to 
success. Still more frequently, however, so far as the writer has 
observed, such men underestimate the difficulties of the problem; 
they take it up with enthusiasm but are forced either to drop it 
or to call in men of wider experience. 

The men to whom they generally turn constitute the third class 
of promoters, namely the larger bankers and brokers. The amount 
of promotion work performed by such men is limited and they usually 
confine their active participation — except for advice— -to the financing 
of such enterprises as they take up. 

The fourth class — and this is a recent important development — 
consists of engineering firms engaged in construction work of various 
kinds. Certain large engineering concerns have established a wide 
reputation for success in operating street railroads, water works, 
electric lighting plants, and so on. These firms naturally have built 
up a large and well-equipped staff of experts in those fields. As 
the staff is expensive, it becomes a pressing problem to keep them 
profitably employed all the time. In the effort to solve this problem 
such firms have drifted into the custom of taking up new enterprises of 
merit and performing the work of promotion themselves. 

3. METHODS OF FINANCING AN ENTERPRISE 1 

The usual method of financing an enterprise is that of interesting 
moneyed men. Other methods are, however, followed on occasion. 
The simplest of these is found when the owner or promoter has the 

1 Adapted by permission from Francis Cooper, Financing an Enterprise, 
pp. 16-18, 21-27. (The Ronald Press Company, 1909.) Later published in 
three volumes under the author's real name, H. R. Conyngton. 



THE ADMINISTRATION OF FINANCE 393 

means, and himself invests the money needed for his enterprise. 
Much difficulty is avoided by the adoption of this plan, but unfortu- 
nately it is not generally practicable. 

Next to this method comes the good old plan of gradual develop- 
ment — the actual building up of the enterprise from the financial 
materials at hand, these materials being at first perhaps the accumu- 
lated means of the parties, then returns from the operations of the 
enterprise itself, or funds secured from some other occupation or 
business while the enterprise is in course of building, or a combination 
of any two or all of these. 

This method is absolutely inapplicable to the development of 
those very numerous enterprises where large purchases, investments, 
or installations are an essential preliminary. There are other cases 
in which it is entirely inadvisable because of the slowness of the 
process, as in the development of a patent with but a limited period 
to run, the building up of a business where competition may only 
be overcome or prevented by quick and brilliant success, and the 
many other cases where time is the " essence" of the undertaking. 

Where this development plan is applicable and advisable, it is 
ideal. It avoids the risks, the mistakes, the expensive experiments, 
and the premature development more or less characteristic of all 
" financed" enterprises in which the managers are inexperienced or 
the lines of business new. 

It is the step-by-step method. A man developing an enterprise 
in this way is, at the start, working on a small scale, his expenditures 
are necessarily limited and his progress is unavoidably slow. His 
experiments are, as a matter of necessity, cautious, carefully watched, 
small in cost, and quick in results, be they good or bad. If good, the 
particular line of effort is pushed; if bad, abandoned without serious 
loss of either time or money. In either case the facts of the particular 
experiment are determined in the course, perhaps, of a few weeks and 
at the cost of a few dollars, while in a more pretentious venture the 
same result would be demonstrated no more satisfactorily at a cost 
of hundreds or even thousands of dollars and months of time. 

During this period the proprietor is going through a course of 
business training from which he secures a grasp of the business, 
and an understanding and control of its every feature that nothing 
else could give so thoroughly and satisfactorily. As a result of this 
he frequently attains a degree of success which would hardly be 
possible under any other system of development. 



394 BUSINESS ADMINISTRATION 

A modification of the personal development method sometimes 
followed with excellent results, is the gradual upbuilding of a new 
enterprise as a side line. That is, the owner, already occupied, con- 
tinues in the business or employment in which he is engaged and 
from which he derives at least a support, and gives the new venture 
such time, attention, and money as it needs or as he can spare from 
his main work. 

The advantages of this "side line" financing, when it is practi- 
cable, are obvious. In a new enterprise of limited capital there is 
almost invariably a period of harassing uncertainty, sometimes quite 
prolonged, when the income is exceeded by the outgo and the future 
of the whole venture trembles in the balance. If then the owner is 
meanwhile profitably employed and able to supply additional funds 
as they are needed, the danger of failure is largely removed and the 
very knowledge that the "base of supplies" is not in danger is in 
itself an element of strength and of success. 

On the other hand, the development of a new enterprise by this 
method is slow, the business itself is almost certain to suffer and per- 
haps fail from lack of attention, and, finally, it may be said that in 
practice most of these side line attempts are failures. 

Another method of financing enterprises sometimes employed is to 
borrow the money required. This is only possible where the personal 
standing or the collateral security of the borrower is such in itself as 
to justify the loan, as it is seldom that the enterprise itself would be 
considered security for the money needed for its development. 

If the enterprise itself is good, the owner or the party in charge a 
good manager, and a loan can be made on fair terms, the plan has 
advantages, mainly in the fact that the control and ownership of the 
new undertaking are left in the hands of the original parties. It is 
true that a bonus must often be paid to secure the money; that 
interest must be paid on the loan, and that the borrowed money must, 
sooner or later, be returned. If the enterprise is successful, however, 
the indebtedness and interest payments are easily carried and paid 
off in due time, and the whole amount given for the use of the money 
should be small compared with the profits of the enterprise that must 
have been given to secure the needed money as an investment. 

If, on the other hand, an enterprise ends in failure, the loaning 
plan is disastrous — far more so than if the money were secured as an 
investment in the enterprise. For this reason many people, well able 
to borrow, prefer to get part or all of the necessary money as an invest- 



THE ADMINISTRATION OF FINANCE 395 

ment in the enterprise rather than as a loan. In this case they divide 
up the risk. They do not look for failure, but they recognize its 
possibility in any undertaking, no matter how good. Therefore they 
prefer to diminish their own interest in the enterprise and in the 
profits to be made, rather than to take chances of a total and perhaps 
disastrous loss in case of failure. 

Also while the interest on the money borrowed is, in the case of a 
good enterprise negligible, there are other dangers connected with 
the method. Loans and interest pa}nnents have a tendency to 
become due at inconvenient times, or if left to run after they become 
due, may be called unexpectedly. Then if not met, they may be 
used to the serious embarrassment of the enterprise. 

As a matter of fact loans are not infrequently made to parties 
having promising enterprises, with the definite hope or expectation 
that they will not be able to pay the amount when due. In such 
case the parties making the loan promptly foreclose and buy in the 
enterprise at a tithe of its real value. 

Another method of financing, frequently practiced, is that of 
taking in moneyed partners. It must be borne in mind that a 
partner has all the rights in the business that the original owner has 
himself. He can interfere in the management of the enterprise, run 
it into debt, if he sees fit, or make trouble in the many other ways 
possible under the partnership arrangement. All this is of no impor- 
tance if the partner is known to be the right kind of a man, who will 
shoulder his part of any burdens to be borne, and who can be depended 
upon to co-operate when needed and to do nothing when not needed. 
If, however, there is any doubt as to the character or disposition of 
the prospective partner, this close alliance should be avoided — pref- 
erably, and as is commonly done, by the use of the corporate form. 

Another point to be considered when a financing partner is taken 
into an enterprise, is the fact that should the enterprise not reach 
the point of profit paying before its funds are exhausted — a con- 
tingency that frequently occurs — the conditions are not favorable 
for securing further money. In a corporation, stock may be reserved 
for just such emergencies, or a special issue of preferred stock or 
perhaps bonds can be arranged. In a partnership, on the contrary, 
there is usually no reserve of any kind that can be offered for addi- 
tional money. If more money is needed each partner should, of 
course, contribute pro rata of his interest for the purpose, but in 
practice it not uncommonly happens that the "financing" partner 
refuses to do this. 



396 BUSINESS ADMINISTRATION 

In any such case, the working partner must do the best he can. 
He may be able to borrow, or he may have to make very material 
sacrifices of his own interests to obtain the needed funds. In such 
case, if the enterprise is successful, he will probably be able to recoup 
himself. It is, however, far better that the possible need of more 
funds should be anticipated and provided for in advance by some 
provision of the partnership agreement. It is better still to avoid 
the contingency by the incorporation of the undertaking. 

The usual, and, speaking generally, the best plan of financing, is 
by the sale of stock in the incorporated enterprise. It offers ad- 
vantages both for the owner of the enterprise and the investor found 
in no other system of business organization. 



See also chap. viii. The Form of the Business Unit. 



4. WORKING CAPITAL AND FIXED CAPITAL 1 

Working capital consists of that portion of the net assets which 
is not tied up in any fixed or permanent form. The chief forms of 
working capital are: (1) cash; (2) accounts and bills receivable; 
(3) finished stock; (4) raw stock and supplies; (5) securities of other 
companies held for investment, not for purposes of control. 

Working capital consists essentially of quick assets, such as are 
convertible into cash within a reasonable time in the ordinary course 
of business. Such quick assets, like fixed assets, are subject to great 
shrinkage in value in event of failure, and should always exceed by 
safe margin the short-time liabilities. The working capital is only 
the difference between the quick assets and the short time-liabilities. 
Some companies operate on a very narrow margin of working capital; 
a few, in fact, possess none at all. But many of the larger producing 
corporations retain as much as half their entire capital in this form. 

The volume of working capital depends upon the nature of the 
business, and it should be determined with reference to: (1) volume 
of the business; (2) distribution of purchases throughout the year; 
(3) the credit terms upon which purchases are made; (4) the credit 
terms upon which sales are made; (5) the period of production during 
which capital is tied up in work in process. 

Most of these factors speak for themselves. A large business 
obviously requires more working capital than a small one. The 

1 Adapted by permission from W. H. Walker, Corporation Finance, pp. 209-10. 
(Alexander Hamilton Institute, 1917.) 



THE ADMINISTRATION OF FINANCE 397 

regularity of purchases is an important factor. In the grape juice 
business, for instance, the entire stock of grape juice for the year 
must be purchased in September and October. The bridge-builder 
may at one time have no stock on hand and at another have large 
sums tied up in materials, pending the completion of a large contract. 
It is plain, therefore, that lines of business which purchase seasonally 
or irregularly, or sell likewise, require a large working capital because 
of the heavy stocks which they carry at times. 

The credit terms of both purchase and sale have great influence 
upon working capital. If the company pays for its materials, say 
thirty days net, and sells upon sixty days' time, it will require a much 
larger working capital than a company which buys on sixty days' 
time and sells on thirty. The writer knows of several companies 
which have no working capital of their own but deal entirely upon the 
trade credit which is extended to them, by buying on long terms and 
selling on short. 

During the period of production, or pending resale of goods, 
capital is tied up by work in process. Some companies turn their 
capital several times each year and require only a small percentage 
of profit on each transaction, while others — for instance, builders of 
ships and ofhce buildings' — turn it less frequently, and consequently 
require a larger percentage of profit on each sale and a correspondingly 
larger working capital. 

In this connection, the extreme importance of perpetual inventory, 
careful stockkeeping, avoidance of wasteful methods, and the main- 
tenance of minimum stocks need to be emphasized. It is better 
for the company to carry a somewhat smaller stock and a larger cash 
balance, under normal conditions, than to carry heavy stocks. The 
large bank balance improves the credit of the company, while the 
large stock often increases manufacturing cost and frequently 
encourages wasteful and careless methods. The larger the stock, 
other things being equal, the slower will be the turnover and the 
greater the working capital required. 

[From the foregoing statement of the chief forms of working 
capital, the student can readily arrive at a statement of the chief 
forms of fixed capital.] 



See also p. 520. Financial Standards. 



398 BUSINESS ADMINISTRATION 

B. The Manager's Relationship to the Financial 
Organization of Society 

We found that our study of the administration of market prob- 
lems was facilitated by an introductory survey of the market forces 
and market structures in terms of which and through which the 
market manager worked out his policies. (See pp. 250-308.) 
Precisely the same situation confronts us in our study of the 
administration of finance. The financial manager, in working out his 
problems, makes use of a great range of institutions and devices which 
have been developing through several centuries. These institutions 
are so interrelated that we have come to call the whole complex " the 
financial organization of society." 

This financial organization of society very largely conditions the 
administration of finances. Upon the one hand, it is made up of 
institutions which the manager uses in manipulating such technical 
devices as stocks, bonds, and commercial paper (see pp. 434-88), 
in carrying out his financial policies. Upon the other hand, this 
financial organization has come to provide the standard orthodox 
ways of carrying out policies and thus it operates as a sort of social 
control system which largely dictates what policies the manager shall 
attempt. 

Clearly enough, we shall not understand either the technical 
devices or the policies of financial administration unless we have 
an appreciation of this institutional background. We begin with 
Selection 5 which gives a general view of the manager's use of our 
financial organization. Selections 6 to 9 show us some investment 
credit institutions, some commercial credit institutions and some 
information gathering institutions of which the manager makes 
immediate and direct use. Selection 10 deals with a secondary range 
of institutions which serve the manager indirectly by serving the 
institutions with which he comes into direct contact. 

PROBLEMS 

1. "The financial organization of society." Just what does this mean to 
you? 

2. "The manager's use of the financial organization of society." Just 
what does this mean to you ? 

3. What financial institutions are available for the financial manager who 
wishes to issue corporate securities ? 

4. What is the practical necessity for underwriting ? 



THE ADMINISTRATION OF FINANCE 399 

5. Wherein is underwriting advantageous to the corporation concerned? 
to the buyer of securities? to the underwriter? to the consumer of 
ordinary commodities ? 

6. Why did the development of investment banking institutions wait 
upon the growth of the corporate form of industry ? Did the absence 
of investment banking houses in an earlier period handicap private 
enterprise ? 

7. "The primary function of the bond house is to obtain capital for the 
creation of new enterprises or the enlargement of old." Just how 
does it "obtain" this capital? 

8. "The investment banker does not require a large capital tied up in 
the plant like a manufacturing organization." Why not ? 

9. What other financial institutions does the investment banker use when 
he engages in underwriting on a large scale ? 

10. Write a summary of the social benefits of the investment banking 

business, 
n. "The commercial bank acts as an intermediary between lenders and 

borrowers. It collects funds from certain people and lends them to 

others." Do you agree ? 

12. Do you see any ways in which the ordinary commercial bank facilitates 
getting "fixed capital" ? 

13. How does the work of commercial-paper houses differ from that of 
pure brokerage ? How does it differ from pure banking ? 

14. What is meant by referring to the banker as a responsible agent in the 
guidance of economic activity ? As an agent in the apportionment of 
our productive resources among the various enterprises of the com- 
munity? Wherein do these questions concern the financial manager 
of an ordinary business ? 

15. What is meant by blue sky laws ? Wherein do they affect the manager 
in his relationship to finance ? 

16. "Certain concerns carry on together the work of engineering and 
operating concerns and also the work of financing houses." Who? 
Why? 

17. How do you account for the fact that concerns make money by secur- 
ing and selling financial information ? Do they fill a real need ? 

18. Make a list of the services that are rendered by trust companies (a) to 
individuals (b) to corporations. Why is the rapid growth of trust 
companies a matter of the last half-century ? 

19. Precisely how does the trust company aid in the marketing of securities ? 

20. Should the manager of a corporation employ a trust company to act 
as fiscal agent or should he care for the problems concerned himself 
and "save the fees" ? 

21. Just how do life insurance companies aid the financial managers of 
other businesses? 



400 BUSINESS ADMINISTRATION 

22. Just how do savings banks aid the financial managers of other busi- 
nesses ? 

23. What types of investment should you expect a savings bank to make? 
Should you expect to find state laws regulating this matter ? 

24. "The Stock Exchange is a market for capital." Do you agree? If 
you disagree, what is the function of the stock exchange ? 

25. Show how the stock market is of service to each of the financial institu- 
tions with which it is connected in the chart on page 403. 

26. Sometimes the "money market" is "tight" and interest rates rise 
and it is not easy to get funds for corporate expansion. Be sure you 
know what this means. 

27. This section of our work sketches a rather impressive financial structure. 
Is it used only by large concerns? How do small corporations get 
their capital ? 

28. "As a matter of fact, persons contribute to the capital of corporations 
of which they have never heard; of which they would disapprove if 
they had heard of them." How can this be true ? 

29. "The manager's decisions on financial problems are largely prescribed 
for him by the financial organization of society. His range of choice 
is a narrow one." Is it ? Is it narrower than it was before there had 
emerged so many financial institutions ? 

30. Make as long a list as you can of financial institutions which are not 
discussed in this section. 

31. Consult question 14 on page 250. Wherein does an awareness of his 
social function make a financial manager a more competent business 
man ? What is his social function ? 

5. A GENERAL VIEW OF THE MANAGER'S USE OF OUR 
FINANCIAL ORGANIZATION 1 

The great number of financial instruments, agencies, and institu- 
tions that are utilized in connection with the borrowing operations 
of producing, manufacturing, and mercantile businesses is indicated 
in the diagrams on the accompanying pages. 

The diagrams, however, require a few words of explanation and 
qualification. In general, the purpose is to show the financial insti- 
tutions and agencies that are employed in the assembling of the 
capital required by modern business enterprise. It is of note, first, 
that the financial structure involved in the raising of fixed capital 
for individual firms and partnerships, as shown on the first diagram, 
is relatively simple, since it is largely contributed by the owner, or 

1 Adapted by permission from H. G. Moulton, The Financial Organization of 
Society, pp. 132-38. (The University of Chicago Press, 1921.) 



THE ADMINISTRATION OF FINANCE 401 

owners, of the business. The greater complexity of the second 
diagram, moreover, is an indication that the development of the 
very intricate and extensive financial organization of the present 
day is largely attributable to the enormous growth of the corporate 
form of business organization. 

With reference to the corporation diagram, particularly, the 
arrows pointing downward from fixed capital indicate the movement 
of the securities that are issued by corporations through the financial 
institutions that assist in marketing them to the ultimate purchasers, 
who in the last analysis furnish the funds to the corporation. In 
some cases the securities do not find lodgment with individual inves- 
tors but are purchased by financial institutions, as is indicated by 
the arrows which point to savings banks, insurance companies, etc. 
In these cases, however, the funds are still furnished by individual 
savers, namely, the shareholders, depositors, etc. These financial 
institutions thus serve as intermediaries in the process of rendering 
individual savings available for the uses of corporate industry. 

The stock market has been placed at one side of the diagram in 
order to indicate that it is not a direct intermediary in the marketing 
of securities. It is rather a great central market place which is 
made use of by nearly all of the various types of financial institu- 
tions in connection with their operations, as well as by the ultimate 
investors in securities. The lines connecting the stock exchange with 
the different institutions are designed to indicate in a general way 
the interrelations that exist. 

Finally, it will be seen that the commercial banks are directly 
concerned with the raising of working capital, and indirectly asso- 
ciated with investment banking institutions in the raising of fixed 
capital. Note the transverse line connecting commercial and invest- 
ment banks. A line might also be drawn from the commercial banks 
to the fixed capital side of the corporation; for to a considerable 
extent they purchase securities directly and make loans to corpora- 
tions for fixed capita] purposes. 

To safeguard against misconception it is necessary to state 
that the diagrams could not be made to reveal all the phases of the 
modern financial structure without complicating them to the point 
of obscurity, it will be well, therefore, to point out here certain 
things which they do not indicate. 

First, although a line is drawn from the corporation direct to the 
purchaser of securities, the corporation chart fails to convey an 



402 



BUSINESS ADMINISTRATION 



adequate idea of the vast amount of capital that is raised without 
the assistance of financial intermediaries. A very great number of 
our corporations have raised their capital by direct subscription; 
indeed, I think it may safely be said that a large percentage of our 
present-day corporations secured their start by converting individual 
firms or partnerships into corporations and issuing shares of stock 
to the owners. There are many " close " corporations — those which 
have never raised any funds from general subscription. Among some 
of the more important of such corporations are: most of the New 



I. INSTITUTIONS UTILIZED IN FINANCING NON-CORPORATE 

ENTERPRISE 



THE INDIVIDUAL FIRM OR 
PARTNERSHIP 



FIXED CAPITAL 



WORKING CAPITAL 

Evidenced by; 

t . Promissory Note* 
2. Bills of Exchange 



INDIVIDUAL'S OR 

PARTNER'S 
CONTRIBUTION 

Evidenced by Article* of Association, 
Books of the Finn, Etc 



MORTGAGE COMPANIES 

Mortgages evidencing borrowed fundi 



Individual 
Purchaser 



COMMERCIAL 
PAPER 
HOUSES 



SAVINGS 

BANKS. 

INSURANCE 

COMPANIES. 

ETC 



COMMERCIAL 

CREDn AND 

DISCOUNT 

COMPANIES 



COMMERCIAL 

BANKS 

AND 

FEDERAL RESERVE 

BANKS 



Shareholders. 
Depositors, Etc. 



Shareholder* and 

Depositors 



England cotton mills; several of the larger chemical companies; the 
Du Pont Powder Company; many of the great department stores 
in all the large cities of the country; the large corporations in the 
aluminum, brass, zinc, asbestos, and sulphur industries; and the 
great majority of financial institutions. 

Second, the charts do not reveal the raising of capital by the 
common process of creating a surplus through setting aside a portion 
of the earnings for an expansion of the business. A tremendous 
amount of capital is thus raised, especially by corporations. It will 
be noted that this method merely involves a decision of the directors 
of the corporation with reference to the disposition of earnings. 

Third, the charts reveal only those credit operations which 
involve the borrowing of funds, as distinguished from actual goods. 
Working capital in part takes the form of materials bought on credit. 



THE ADMINISTRATION OF FINANCE 



403 



A retailer, for instance, may do most of his borrowing by buying 
goods from wholesalers on time. But since the wholesalers who 
sell these goods on credit to the retailer, usually borrow from the 
commercial banks during the interval while awaiting payment, it 
all comes to much the same thing in the end — working capital is 
largely borrowed from the commercial banks. 

The corporation chart does indicate, however, that a portion of 
the working capital is usually derived from the sale of securities. 
Indeed, if a business is to have a good credit standing with its bank, 

II. INSTITUTIONS UTILIZED IN FINANCING CORPORATE 

ENTERPRISE 



B: 



THE CORPORATION 



FIXED CAPITAL 

Evidenced b r 
I. Slock. 

2- Short Term Note* 
3. Bond. 



WORKING CAPITAL 

Evidenced by. 

I. Pro miwory Note* 
2- BUI* of Exchange 



PROMOTERS 

AND 
DEALERS IN 
LOW GRADE 
SECURITIES 



INVESTMENT 

BANKING 
INSTITUTIONS 

(Bond Houiet Un- 
derwriter., etc) 
Deling in High 
Grade Securities 



COMMEHOAL 
PAPER 
HOUSES 




COMMERCIAL 
CREDrT AM) 

DISCOUNT 
COMPANIES 



COMMERCIAL 

BANKS 

AND 

FEDERAL RESERVE 

BANKS 



Shareholda 

and 
Depositor! 



it must, in fact, provide a considerable part of its working capital 
by stock subscriptions. 

Fourth, one might conclude from the corporation diagram that 
savings banks are associated only with the problem of raising fixed 
capital. As a matter of fact, many savings-bank loans are also 
made for working capital purposes. 

Fifth, the position of the trust company in the financial structure 
of society is not adequately revealed. As the chart stands, the trust 
company is related only to the raising of fixed capital and is placed 
in a parallel position with savings banks and insurance companies. 
In fact the trust company performs so wide a variety of functions 
that it is impossible in the present diagram to indicate its relation- 
ship to the entire financial structure. The commercial banking 



404 BUSINESS ADMINISTRATION 

department of the trust company would go with the commercial 
banks, the bond department with the bond houses, the savings 
department with the savings banks, the insurance department with 
the insurance companies. But, in addition, the trust company per- 
forms a great variety of services for the holders of corporate securities 
in connection with the safekeeping of valuables, the holding of mort- 
gages in trust, the transfer of ownership of stocks and bonds, the 
financial reorganization of companies, etc. 

Finally, the diagrams tend to give a false impression of specializa- 
tion by financial institutions. The truth is that more and more 
there is being conducted under one roof and by a single administra- 
tive organization a great variety of financial activities. Just as the 
trust company has many departments, the commercial bank nowa- 
days usually has associated with it savings and bond departments, 
and, in the last two or three years, trust departments as well. The 
designations given on the diagram must, therefore, be considered as 
representing types of financial functions rather than (in every case) 
distinct and specialized financial institutions. 

6. INVESTMENT CREDIT INSTITUTIONS USED 
DIRECTLY BY THE MANAGER 

A. THE UNDERWRITERS 1 

One means of floating an issue of securities is to dispose of them 
through the agency of banking and brokerage houses. In such 
cases the financial houses may not merely undertake to sell the 
securities, but may make themselves responsible for the success of 
the sale. 

Advantages of underwriting to the corporation. — There are several 
reasons why banking and brokerage houses may properly carry on 
this business of financial underwriting and why the business is usually 
profitable both to themselves and to the corporation which issues 
the underwritten securities. In the first place, the bankers are 
presumably experts in the valuation of securities. Their judgment 
as to the price which should be set on a new security or as to the 
terms of exchange, if the new security results from a conversion of an 
old security, is a valuable, authoritative judgment. In the second 
place, the bankers are also experts in selling securities and each house 
involved in the underwriting usually has an established clientele to 

1 Adapted by permission from W. H. Lough, Corporation Finance, pp. 294.-304. 
(Alexander Hamilton Institute, 191 6.) 



THE ADMINISTRATION OF FINANCE 405 

whom it may readily dispose of almost any securities that it recom- 
mends. The corporation, on the other hand, has no facilities what- 
ever for selling stocks and bonds; its activities are in the field of 
transportation, or industry, or trade, not in finance. 

Two further reasons are even more potent in inducing corporation 
managers to have new security issues underwritten. First, even 
though the corporation can obtain expert financial advice and is 
reasonably sure to make a success ultimately of the sale of any 
securities it puts out, yet the time that will elapse before the sale is 
completed and the money received is always uncertain. Now the cor- 
poration ordinarily would not be trying to sell new securities if it did 
not need money at once or in the near future. It is disastrous to the 
success of many industrial or commercial operations to hold them in 
abeyance until the tedious process of selling a large block of bonds 
or stocks is completed ; yet it is dangerous to go ahead so long as the 
sale is incomplete. The second reason is that the credit of a corpora- 
tion is seriously affected by any apparent inability to market its 
securities. One failure — or even a success that is too hard-won — 
would hamper the corporation greatly both in getting loans and in 
making future sales of stock. 

Advantage to the buyers of securities. — There are telling advantages 
to the buyers of securities also in having them underwritten. Repu- 
table banking houses never sell securities until after they have been 
satisfied by a searching investigation that the securities are all that 
they are represented to be. 

Another advantage to the buyer is that he may be sure that the 
whole security issue has been sold by the corporation. A half-sold 
issue is a sign of weakness and a hindrance to the completion of the 
corporation's plans so serious as to reduce the value usually of the 
portion that has been sold. 

A third advantage to the buyer is that any reputable banking 
house will watch closely any security that it has underwritten, and 
will come to the assistance of the security-holders in case the corpora- 
tion later gets into difficulties. 

When is underwriting advisable? — It must not be inferred that 
every new stock or bond issue ought to be underwritten. Small 
issues, say $500,000 or less, can usually be sold to a comparatively 
small number of investors by direct solicitation on the part of the 
corporation. Then again, well-established, successful corporations 
frequently sell new stock or bond issues to their stockholders at 



406 BUSINESS ADMINISTRATION 

bargain prices. Ordinarily there is no risk in such a sale and conse- 
quently no necessity for underwriting. 

Why underwriting syndicates are Jormed. — It would naturally be 
expected that each of the large financial houses engaged in the under- 
writing business would handle on its own responsibility whatever 
business conies its way, and that rivalry would prevent their co- 
operating to any considerable extent. The fact is, however, that 
these houses have long since learned that it is inadvisable for any 
one of them, no matter how powerful, to guarantee the success of a 
large security issue. It is true that the banker's judgment and 
experience should enable him to avoid heavy risks; yet a certain 
amount of risk is inevitable. It is not considered conservative bank- 
ing, therefore, for any one house or even any two or three houses 
to underwrite a large issue. 

Another reason for co-operation among bankers is that each 
house desires to offer a variety of securities to its clientele. If it 
specializes too much or offers only a few securities, it cannot expect 
to attract and hold regular customers. 

A third reason for co-operation is in order that a broad geo- 
graphical distribution may be obtained and the sale of the security 
issue be made correspondingly easy. 

Five types of syndicates: — Originally the normal arrangement was 
to have the syndicate as a whole guarantee the price of the issue 
and let the corporation attend to the selling. This is underwriting 
in the original sense of the word; it is a species of insurance. Under 
such a plan the syndicate would have two sources of profit: first, a 
commission on the portion sold to the public, or a fixed bonus; and, 
second, the difference between the wholesale price to them and 
the retail price at which they would ultimately dispose of the 
bonds. 

A second type, also rather unusual, is a syndicate formed to take 
an "underwriter's option." Under this plan the syndicate takes the 
block of bonds or stock at a fixed price, payable only as resold. As 
fast as the syndicate disposes of the bonds it turns over the proceeds 
to the corporation, after deducting whatever it receives above the 
fixed price. The corporation pays somewhat less for this service 
than for other kinds of underwriting, because the syndicate takes no 
risk; on the other hand, as the corporation cannot be certain when 
it will get its money, the type is not much favored by conservative 
corporation managers. 



THE ADMINISTRATION OF FINANCE 407 

The third type of syndicate comes into existence when a large 
banking house has bought for itself a big security issue and wishes to 
distribute the risk. In such a case the original underwriter fre- 
quently calls upon other banking houses and upon individuals to 
take portions of the issue at prices low enough to be attractive. 

The fourth type of syndicate acts as a unit in making a contract 
for the purchase of an issue and pools the sale of the stock or bonds. 
The chief difference between the third and fourth types lies simply in 
the fact that the syndicate members deal directly with the corpora- 
tion, not with a banking house. They thus secure for themselves 
all the profits of the underwriters. Such a syndicate is always man- 
aged by some one house or individual having complete authority. 

The pooling arrangement above described, although it secures 
centralized and efficient management, is apt to prove unsatisfactory 
in that it does not bring into play the whole selling machinery of the 
various syndicate members. For this reason it has become more and 
more customary of late years to distribute the security issue among 
the members of the syndicate. This is the fifth type of an under- 
writing syndicate. Strictly speaking, of course, the distribution of 
securities is not an underwriting in any sense, but a sale. It is a 
sale at a special price, however, made under certain restrictions and 
designed to serve exactly the same purpose as true underwriting; 
the term therefore is freely applied to it in the Street. 

B. INVESTMENT BANKING AND BOND HOUSES 



That part of the public which does not buy bonds has little idea 
of the importance and value to the community of the bond business. 
It is not necessary to resort to many figures. In round numbers, 
$1,500,000,000 of American bonds are marketed every year and almost 
all of them pass through the hands of American bond houses. Even 
those issues of which the ultimate nominal market is the New York 
Stock Exchange are first offered and sponsored by dealers in bonds. 
In volume and number the transactions on the exchange are only a 
mere fraction of those in direct merchandising. Of this $1,500,000,000 
of bonds one-third is absorbed by insurance companies, savings 
banks, trust companies and other banks (in approximately equal 

1 Adapted by permission from Lawrence Chamberlain, The Principles of Bond 
Investment, pp. 513-15. (Copyrighted by Henry Holt and Company, 1911.) 



408 BUSINESS ADMINISTRATION 

amounts) and the remaining two-thirds by corporations (for reserve, 
etc.) and by private investors in this country and abroad. 

The leading banking houses were not always primarily bond 
houses. Two generations ago financial business was transacted by 
" bankers and brokers." Bond selling was an incident to the general 
banking, exchange, and brokerage routine. It was all done "over 
the counter." There was comparatively little implied responsibility 
on the part of the vendor. In the age of Commodore Vanderbilt, the 
elder Gould, Fisk, and Drew the " caveat emptor" principle of 
exchange was accepted and the devil took many beside the hindmost. 
But now the speculative business in New York, so far as it is reputable 
and consequential, is done by " members of the New York Stock 
Exchange" and the investment business is done by " bankers, dealers 
in investment bonds." 

The primary function of the bond house is to obtain capital for 
the creation of new enterprises or the enlargement of old. So far 
as concerns these houses in their proper capacity the capital obtained 
is in the form of loans. The houses purchase the loans outright for 
their own account and resell to their clients. As in any sort of 
merchandising, there are few wholesalers and many retailers. The 
prominent " wholesale" bond dealers, numbering less than a dozen, 
confine themselves for the most part (as far as American corporation 
loans are concerned) to the great railroad systems. They have few, 
if any, traveling representatives. Their sales, in this country, are 
effected by public subscription, stimulated through extensive adver- 
tising, and by distribution to large institutions, such as the insurance 
companies, and to the smaller bond houses. 

''Retail" is not a term properly descriptive of the firms in mind, 
although it suggests the relative size of the issues handled and the 
relative volume of business. It misleads if it suggests that the main 
business of such houses is to distribute among small investors issues 
that originally were investigated and purchased by "wholesale" 
houses. This is not the case. For the most part each of the American 
bond houses buys its issues independently, in accordance with its 
policy regarding investments, or it buys them in "joint account" with 
other houses having similar policies. These houses are autonomous; 
their prosperity is built on their ability to find and obtain, on the 
one hand, funded obligations that merit investment, and on the other, 
a clientele that has faith in them and their business judgment and 
probity. 



THE ADMINISTRATION OF FINANCE 409 

[This reading should not leave in the student's mind an impression 
that such houses deal only in bonds. They handle stocks as well.] 

II 1 

These banking houses vary a great deal in the range of work they 
undertake. Some occupy themselves exclusively, or almost exclu- 
sively, with municipal finance. Though they may get into other 
fields, they are likely to do so as brokers, or as a result of trading, or to 
carry some other kinds of securities to satisfy the needs of their clients. 
Such houses do not especially concern us. Other houses make the 
financing of public-service corporations, other than steam railroads, 
their principal interest. Even in the field of public utilities houses 
may specialize, as in the securities of gas, or of electric light and power 
corporations, or in the securities of street railway corporations. 

While speaking of houses chiefly interested in the financing of 
public service corporations, we should especially mention certain 
organizations which carry on together the work of engineering and 
operating concerns and financing houses. They both operate and 
supply the funds for the corporations they are interested in. Some- 
times they originally did the engineering work for the construction 
of the corporations. Though such organizations are not numerous, 
they are important. 

Other banking houses concern themselves especially with financing 
the steam railroads. Only two or three have the necessary capital 
and financial connections to handle the largest issues of railroad 
securities. Railroads, however, often have smaller issues, as for 
the construction of branch lines or for the purchase of equipment, 
within the financial ability of ten or a dozen other houses, and 
commonly these other houses get the financing of such issues. Many 
houses which do not act directly as bankers for railroads, or seldom 
do so, still make railroad financing their principal interest by par- 
ticipating in underwriting transactions and acting as distributors of 
the securities. 

A good many banking houses have refused to go outside of these 
fields. There is no reason why a banking house, recognizing the 
liability of industrial corporations to greater fluctuations in earnings, 
and in other ways the greater business risks involved, should not 
undertake the financing of industrial enterprises, and many do. 

1 Adapted by permission from W. H. Lyon, Corporation Finance, II, 39-48. 
(Houghton Mifflin Company, 1916.) 



410 BUSINESS ADMINISTRATION 

The total number of banking houses of this kind in the United 
States is not great. Of about 4,000 offices, at the time of writing, in 
some way dealing in securities, practically all are brokerage offices of 
one kind or another. At the time of writing, the membership of the 
Investment Bankers' Association comprises 340 main offices and 
176 branch offices of these houses. Practically the entire organized 
business of financing the capital account of our corporations centers 
in these houses. The total number of branch offices is undoubtedly 
much greater. The branch offices listed as members have, most of 
them, considerable autonomy in managing their affairs. 

People are likely to assume from the magnitude of the transac- 
tions undertaken that the business must require the banking house to 
have a large capital. But the business does not require a large capital 
tied up in plant like a manufacturing organization. The investment 
banker is engaged in dealing in credit and requires capital only as an 
assistance in commanding credit. When the banker supplies the 
corporation with capital, he receives the corporation's securities at 
the same time. How much of the capital the banking house must 
advance itself and how much it can borrow on the transaction depend 
on the nature of the securities, the position, senior or junior, that they 
occupy in the corporation's plan of capitalization, and, especially, 
whether they are of a kind to command a relatively quick and close 
market. Depending on these conditions the banker can borrow from 
50 to 90 per cent of the money necessary to complete the transaction 
of purchasing the securities from the corporation. Though the 
loan will rarely be so small, in actual practice, as 50 per cent, the 
lender produces the same effect by insisting on mixed collateral and 
by accepting only a percentage of slow and wide market securities as 
collateral for a loan. 

A reader entirely unfamiliar with financial transactions may 
wonder where the investment banker borrows the money. He 
borrows at any national bank, state bank, or trust company ready to 
undertake the business. 

7. COMMERCIAL CREDIT INSTITUTIONS USED 
DIRECTLY BY THE MANAGER 

A. THE COMMERCIAL BANK 1 

Commercial banks perform a great variety of services, some of 
them being in the nature of incidental conveniences to individuals 

1 Adapted by permission from H. G. Moulton, The Financial Organization of 
Society, pp. 361-75. (The University of Chicago Press, 1921.) 



THE ADMINISTRATION OF FINANCE 411 

and businesses, and others of fundamental importance from the 
standpoint of the general economic system. 

First, commercial banks serve as places of security for the keeping 
of funds that are temporarily not needed by their owners. Having 
well-equipped vaults, and being managed (with rare exceptions) by 
men of integrity, the risk of loss to the owner from fire, theft, or other 
contingencies is very greatly minimized. 

Second, commercial banks serve as money changers. In accom- 
modating each individual customer with the kinds and denominations 
of money desired, they supply the community as a whole with the 
forms of currency best adapted to its commercial needs. 

Third, through the system of checks, or deposit currency, the 
commercial banks make possible the use of a form of currency which 
is a particularly convenient means of payment. 

Fourth, the use of checks greatly reduces the risks of monetary 
transactions. Unless indorsed in blank, checks are good only in the 
hands of the person to whose order they are drawn; and accordingly 
the risks from possible loss or theft are virtually negligible. 

Fifth, the check system greatly facilitates the keeping of accounts 
by individuals. Indeed, the banker may virtually take over the indi- 
vidual's bookkeeping; for if a person deposits with his bank all the 
money he receives in a year and makes all his payments by check, 
he always has an accurate record of his financial status. 

Sixth, the commercial banks perform important services for 
individuals in transmitting money from one part of the country to 
another. Upon receipt of the necessary funds, the bank draws a 
draft upon a correspondent bank in the city where the payment is to 
be made, asking it to pay the designated party a specified amount of 
money. Settlements between the two banks may be made in various 
ways. 

Seventh, bankers act as collection agents for their customers, for 
promissory notes, drafts, coupons, etc. At or before maturity, the 
individual turns his credit instrument or claim over to the bank for 
collection. Upon receiving the funds, through its messenger service 
or by way of correspondent banks, the bank credits the individual's 
account with the amount received. If the obligations are not paid, 
the individual is notified and the bank officials are in a position to 
serve as witnesses in proof that the claim has been duly presented. 

These various services are only the simpler ones performed by 
the commercial banks. Their functions in connection with the issue 



412 BUSINESS ADMINISTRATION 

of bank notes and the creation of bank credit or deposit currency are 
the functions which constitute the distinguishing characteristics of 
commercial banking; they are what give it its paramount importance 
in the general economic organization of the modern world. 

In the making of bank loans there are two main problems. First, 
there must be assurance that the borrowers are all in sound financial 
position — that the loans will surely be safe. Second, the maturities 
of loans must be arranged so as to facilitate meeting the varying 
demands for cash at different times and at different seasons. 

The ordinary commercial bank has the option of loaning funds 
(extending credit) in the following ways: (i) on single-name promis- 
sory notes of individuals and corporations; (2) on two-name paper — 
indorsed notes and accepted drafts (trade acceptances); (3) on the 
security of real estate mortgages; (4) on promissory notes secured 
by other notes as collateral; (5) on promissory notes secured by stocks 
and bonds; (6) on drafts secured by bills of lading; (7) on promissory 
notes and drafts secured by warehouse receipts; (8) by investments 
in stocks, bonds, short-term notes, mortgages, etc. 

Loans may also be classified according to whether they are time 
loans (thirty, sixty, ninety days, or more) or demand loans. Demand 
loans are of two types: (1) the so-called "call" loans, where the loan 
is of indefinite duration but terminable at a moment's notice at the 
option of either the bank or borrower; these are found only in New 
York City, and are used in connection with stock-market speculation; 
(2) demand loans, where it is understood that the bank will allow the 
loan to run indefinitely, in the absence of any untoward development 
which might imperil its ultimate safety. Such a loan is in effect 
ordinarily terminable only at the option of the borrower. 

Another classification of bank loans — one which runs in terms of 
the use to which the funds borrowed are to be devoted — is that of 
commercial and investment loans. It may be recalled that com- 
mercial loans are used for working capital purposes. Whether with 
producer of raw materials, manufacturer, commission merchant, 
wholesaler, or retailer, the funds borrowed are employed in meeting 
pay-roll requirements or in buying the materials or goods required in 
the operation of the business. They usually run for short periods by 
virtue of the fact that the time required to carry to fruition the pro- 
ductive process in which they are assisting is ordinarily of relatively 
short duration. 

With investment loans, on the other hand, the funds are devoted 
to fixed capital purposes; hence such loans are usually of relatively 



THE ADMINISTRATION OF FINANCE 413 

long duration. In the course of our analysis we shall have occasion 
to show that the commercial banks furnish funds for fixed capital 
purposes in various ways — some of them direct, others indirect. 

B. NOTE BROKERS, COMMERCIAL PAPER, COMMERCIAL CREDIT AND 

DISCOUNT COMPANIES 

I 1 

The reader may question the economic justification for the exist- 
ence of the note broker. In anticipation of such a question we may 
say that both the merchant and the banker derive many advantages 
from the note broker's work. The merchant, even though his local 
bank has loaned to its full capacity, is able to raise sufficient cash 
through his notebroker, provided, of course, that the merchant is in 
good credit standing. Thus, the note broker saves the merchant 
time, worry, and sometimes embarrassment in obtaining loans. 
Moreover the merchant, by borrowing through the note broker 
from banks in different parts of the country, is frequently able- to 
obtain cheaper rates of interest than could be obtained at the 
home banks. Then, there is some advantage to the merchant in 
having his paper in many hands. The chief among these is that 
he becomes known as a good credit risk and will have a wide range 
of people with money to lend at any time he enters into a large 
transaction. 

The advantages to the bank may be summarized as follows: 
first, a bank may not be able to loan sunicient funds in its own com- 
munity, the market is too narrow. Through the note broker, how- 
ever, the market is extended to absorb all the bank's available funds. 
Second, the bank is frequently enabled to obtain better interest rates 
in other parts of the country than home conditions warrant. Third, 
the bank likes a certain amount of this kind of paper, because there is 
no obligation to renew it at maturity. A bank which loans to the 
merchant direct is practically obliged to support him by renewing his 
note if necessary. On the other hand, the transaction between the 
broker and the bank is a purely personal one and if the bank refuses 
to buy the notes or renew them, the merchant knows nothing about 
it, nor does he care, just so the notes are sold. 

The note broker, on his part, wants all the paper put out through 
him to be good, for if one of his clients defaults, the broker's business 

1 Adapted by permission from R. P. Ettinger and D. E. Golieb, Credits and 
Collections, pp. 50-52. (Prentice-Hall, 191 7. 



414 BUSINESS ADMINISTRATION 

may be seriously injured. Moreover, the broker is well equipped, 
because of his specialized interests, to pass judgment upon the quality 
of paper he handles, and he will see to it that the merchant does not 
over-extend. For these reasons the banker feels secure in accepting 
paper recommended by the reputable note broker. Indeed, it is 
seldom that such paper is not honored. 

II 1 

The commercial paper house is an outgrowth of the note brokerage 
business that existed in this country in the early years of the nine- 
teenth century. It was not until well after the Civil War, however, 
that the modern phase of the business developed — the phase, that is, 
that distinguishes the work of the commercial paper house from pure 
brokerage; and its greatest growth has come only during the last 
fifteen or twenty years. The discount companies are of even more 
recent development. While some of them purchase accounts receiv- 
able from many different types of business, these companies owe 
their most significant development to the automobile industry and 
the exigencies with which its financing has been confronted. 

The commercial paper house acts as a broker in that it brings 
buyer and seller — that is, lending bank and borrowing customer — 
together, and receives a commission, regularly one-eighth of i per 
cent of the face value of the note; but it is more than a broker, in 
that it advances the funds to the borrower and runs the risk of having 
to hold the paper until maturity. 

Tt should be understood that the commercial paper house never 
desires to hold the paper to maturity, that it seeks to make its 
profits out of the commissions which it receives as middleman. And 
since its chance of large profits lies in obtaining commissions on a very 
large volume of sales, it will be seen that carrying paper serves to 
reduce the profits that can be made. In fact, moreover, the cases 
where the commercial paper house does hold the paper until maturity 
are relatively few. It should be observed, however, that in all 
cases the commercial paper house may have to make a temporary 
advance of funds, during the interval of time between the purchase 
of the paper from the borrower and the sale of it to a commercial 
bank. 

In recent years there have developed a number of other financial 
institutions, whose work, like that of the commercial paper houses, 

1 Adapted by permission from H. G. Moulton, The Financial Organization of 
Society, pp. 427-29, 437-38, 444. (The University of Chicago Press, 192 1.) 



THE ADMINISTRATION OF FINANCE 415 

is mainly that of intermediary between borrowing business and 
lending banks. The institutions in question are variously designated 
as discount houses, finance companies, commercial credit companies, 
commercial acceptance trusts, automobile banks, etc. It is some- 
what difficult to describe the work of these companies, for the reason 
that the terminology commonly employed in describing their opera- 
tions is far from uniform — and the principles of operation themselves 
not highly standardized. Moreover, since certain houses specialize 
in a particular type of operation, while others engage in more than 
one form of financial enterprise, it is impossible to state that the 
financial institutions in question are always conducted on principles 
thus and so. There are, however, at least two distinct types of 
financial enterprise which may be differentiated: (1) the purchase of 
accounts receivable from business concerns — in various lines — which 
are in need of additional working capital; and (2) the financing of 
the distribution of automobiles and other products that are commonly 
sold on the instalment plan. 

There are two principal reasons why business concerns on occasion 
sell or assign accounts receivable: (1) to secure the necessary funds 
with which to postpone or forestall financial insolvency; and (2) to 
secure additional working capital with which to expand the volume 
of business. The first practice is usually regarded as "illegitimate" 
financing, something to be frowned upon by all conservative and 
constructive business men. The second — a development of the last 
ten years — is in a very different category. 

The work of the automobile bank is similar to that of the com- 
mercial paper houses and discount companies described above. 



See also p. 499. Borrowing by Assignment of Accounts Re- 
ceivable. 



8. SOME FINANCIAL INFORMATION GATHERERS 

A. THE MERCANTILE AGENCY 1 

The first mercantile agency in the world was established in the 
city of New York in 1841. 

At that period [around 1830-60] it was customary for western and 
southern traders to visit the eastern wholesale merchants and manu- 
facturers twice a year to make their purchases in person. The terms 

- Adapted by permission from Seventy-Five Years of the Mercantile Agency, 
1841-1Q16, pp. 4-7, 12-20, 80-85. (R- G. Dun and Company, 1916.) 



416 BUSINESS ADMINISTRATION 

of sale were very simple. The buyer agreed to pay for the goods 
purchased when he came again. In other words, the prevailing 
system was six months' credit on all transactions. If a firm had 
just started in business its buying partner brought with him — on his 
first visit to the eastern jobbers — letters of recommendation from 
other merchants in his vicinity, these letters being addressed to the 
houses from which the merchants were themselves purchasing and to 
whom they were well known. This was the system that had existed 
from colonial times, but as the country expanded it showed an increas- 
ing tendency to break down. Means of travel and communication 
were slow and uncertain, and if the letter of introduction failed to 
convey sufficient information upon which to extend credit with safety, 
weeks might elapse before it could be supplemented. Meanwhile, 
of course, the buyer would go elsewhere for his goods, and a valuable 
account might be lost. Moreover, after once having established trade 
relations on a credit basis, the jobber had little or no means of judging 
whether the affairs of his customer were prospering or the reverse. 
Periods of depression occurred with great frequency in which the 
eastern sellers lost heavily, owing to the inability of western and 
southern buyers to meet their obligations. Some of these retail 
failures were caused by crop shortages, others by money stringency, 
but the greater proportion were due to the fact that credit had been 
injudiciously extended to traders who were not entitled to it through 
lack of reliable information. 

The prevailing system of long-term credits, based upon very 
insufficient information as to the buyer's responsibility in most 
instances, was one of the chief causes of the great panic of 1837, and 
contributed especially to the extraordinarily high number of failures 
that occurred among strictly mercantile houses during that crisis and 
the periods of severe depression that succeeded it in 1839 and 1840. 

Among the more notable failures was that of Arthur Tappan & Co. 
The failure of A. Tappan & Co. left Lewis, its credit manager, free 
to engage in some new occupation. His wide experience in appraising 
the credit responsibility of traders, and the high regard in which his 
opinions on credits were held by other wholesale merchants, suggested 
the idea of organizing a credit reporting bureau devoted to collecting 
and disseminating such information for the benefit of the mercantile 
community as a whole. 

Encouraged by the result of the inquiries he had made among his 
fellow-merchants as to the favor with which they would regard his 



THE ADMINISTRATION OF FINANCE 417 

novel enterprise, Lewis Tappan determined to establish what he 
called "The Mercantile Agency" in the year 1841. 

When the new Agency was opened for business, Mr. Tappan's first 
step was to issue a circular to lawyers and others inviting them to 
become his correspondents. In this way he hoped to be able to secure 
in advance, sufficient data regarding the standing of traders to enable 
merchants to whom they might subsequently apply for credit to 
determine what amount of credit, if any, could safely be accorded to 
them. The responses to the preliminary circular proved satisfactory, 
and The Mercantile Agency rapidly accumulated a valuable mass of 
reports. These were written in longhand — the invention of the 
typewriter was still many years in the future — in huge ledgers bound 
in sheepskin. 

Mr. Dun in 1859 became the sole proprietor of The Mercantile 
Agency. The great event of the year in which the change in owner- 
ship took place was the publication of The Mercantile Agenc}''s 
first Reference Book. This was issued February 1, 1859, and was a 
quaint, old-fashioned affair compared with those issued at present. 
It was bound in dark brown sheepskin covers (nearly red), extra 
strong and thick, and with a lock, so that the proprietor of the sub- 
scribing firm might retain a key and thus keep its precious contents 
from the prying eyes of his subordinates or visitors. The volume 
contained 519 pages, iof inches high by 8f wide, with a maximum of 
42 names to a page; an index to cities and towns of two pages, and 
one of firm names, arranged alphabetically, of 43 pages. Altogether, 
this first reference book contained 20,268 names. 

The publication of the Reference Book, then begun, is still con- 
tinued, the work at present being issued quarterly and containing 
the names of all traders and manufacturers in the United States and 
Canada, the January, 191 6, book comprising no less than 1,882,226 
names altogether. 

B. THE NATIONAL ASSOCIATION OF CREDIT MEN 1 

[This selection should be read as a sample indicating associative 
action in dealing with financial problems. A manufacturers asso- 
ciation, a cost accountants association, and an association of depart- 
ment stores to study financial problems are other samples. Can 
you cite others ?] 

1 Adapted by permission from the pamphlet, A Builder of Conscience and Com- 
merce. (Issued by the Association, 1913.) 



41 8 BUSINESS ADMINISTRATION 

The work of the Association is directed by annual conventions 
and carried on by standing committees whose names indicate their 
duties. 

They are: Legislative; Membership; Bankruptcy Law; Adjust- 
ment Bureau; Credit Department Methods; Mercantile Agency; 
Credit Co-operation; Investigation and Prosecution; Fire Insurance; 
Business Literature; Banking and Currency; Credit Education; 
Commercial Arbitration; Commercial Ethics. 

No practical business man anywhere should willingly withhold 
his approval of the purposes and objects which gave rise to the 
National Association of Credit Men. 

The object of this Association shall be the organization of individual 
credit men and associations of credit men throughout the United States, in 
one central body for the purpose of rendering more uniform and establish- 
ing more firmly the basis upon which credits in every branch of commercial 
enterprise may be founded, which shall include a demand for the reform of 
laws unfavorable to honest debtors and creditors, and the enactment of 
laws beneficial to commerce throughout the several states; the improve- 
ment of existing methods for the diffusion of information, the gathering 
and dissemination of data in relation to the subject of credits; the amend- 
ment of business customs, whereby all commercial interests may be benefited 
and the welfare of all may be advanced; the provision of a fund for the 
protection of members against injustice and fraud, and such other objects 
as the members of this Association may determine. 

Membership in general is confined to bankers, manufacturers, 
wholesalers, and jobbers. Today [1913] over 17,000 of the largest 
concerns located in every state of the United States are united to 
carry out the purposes of this organization which means that member- 
ship therein implies working with a vast body of representative 
business houses along the same lines and toward the same important 
ends. 

The Association has been instrumental in having enacted laws 
making more hazardous dishonest practices among both debtors 
and creditors. In all legislation which it has recommended, the 
impelling motive has been greater simplicity, uniformity, safety, 
and stability in the extension of credits. Briefly this legislative 
effort covers: 

1. The bulk sales law, now on the statute books of all states but 
one. (It regulates the transfer with proper protection to creditors, 
of stocks of goods in bulk thus safeguarding honest retailers.) 



THE ADMINISTRATION OF FINANCE 419 

2. A law penalizing the giving of a false written statement in 
order to secure credit. (In this matter is co-operating with the 
American Bankers' Association.) 

3. Laws to place greater responsibility upon collection agencies. 

4. A law to punish the vicious practice of issuing checks without 
sufficient funds to cover them for the purpose of securing credit. 

5. Amendments to the over liberal exemption laws of the several 
states, to regulate the doing of business under a fictitious name, and 
to give greater clearness and uniformity to the lien and conditional 
sales laws of the various states. 

6. A law calling for the recording of chattel mortgages with 
county recorders as well as town clerks. 

7. Measures providing for more prompt and business-like adminis- 
tration of our lower courts. 

Credit departments as they are known today have come into 
being during the life of this Association. They came because 
specialization meant efficiency and efficiency security, for credit 
granting can no longer be a matter of guess-work; haphazard methods 
mean failure more certain than formerly. Modern business has grown 
to such a size and complexity as to require scientific methods in its 
administration and as a consequence the demands upon the credit 
man have become such as to call for a training more and more exacting. 

Also the steadying influence which the developing of the credit 
department has exerted upon general business cannot be exaggerated. 
Through it (1) inquiries into the credit standing of customers have 
become more searching; (2) the property statement as a basis for 
credit granting has been developed and put into common use; (3) mer- 
cantile agencies have been induced to provide prompter, fuller and 
more exact information; (4) better bookkeeping systems throughout 
the trade are being insisted upon; (5) earnest campaigns have been 
inaugurated looking to the elimination of abuses such as unearned 
discounts, unfair claims, cancellations, etc., which are eating close to 
the heart of profits; (6) dangerous tendencies such as over-selling 
have been discouraged; (7) the retailer is being educated to the 
necessity of protecting his credit standing, to the essentials of suc- 
cessful merchandising and to the fact that his interests and those of 
his creditors are not hostile. 

Recognizing the advantage of exact, uncolored facts in determin- 
ing the degree of hazard accompanying each risk, over 60 per cent 
of the local associations of credit men have established "bureaus for 



420 BUSINESS ADMINISTRATION 

exchange of credit information" by means of which the strength and 
weakness in the standing of a customer can be determined with an 
exactness not possible through any other means. 

The aim of the Association for the elimination of waste in com- 
mercial transactions has led it into the field of arbitration, and its 
committee on this subject is at work determining what changes in 
the laws of the states must be brought about to make effective the 
decisions of arbitration courts, has formed what it hopes will become 
a model statute which it will endeavor to pass in the leading states, 
and is arousing a general interest among business men on this subject. 
Already in several centers arbitration facilities have been set up and 
are doing highly satisfactory work. 

C. FORECASTING SERVICES 1 

How can the business manager foretell approximately when prices 
and costs are going to change and accordingly adjust his financial 
policies? In the case of short-run price fluctuations (say daily or 
weekly or monthly) contracting out, hedging on speculative exchanges, 
etc., are available devices in some cases. Customary prices and rela- 
tively stable demand may assist in others. In still other cases experi- 
ence and intuition count for much. When it comes to forecasting 
price changes concomitant with the business cycle, however, the 
manager may do one of three things: (a) Select, compile, and organize 
significant data after a study of many scattered sources of material, 
e.g., crop reports, financial periodicals, trade journals, etc., and on 
this basis attempt to reach conclusions concerning future price trends. 
(b) Subscribe to one or more "financial services" sold by organizations 
which select, compile, and organize the data for him. Much of this 
material comes from sources listed above, (c) Combine methods (a) 
and (b). 

To suggest the utility of the "financial services" is the purpose 
of this paper. First, let us indicate some points common to nearly 
all of the services: (a) Certain "indexes" of business conditions are 
selected, e.g., unfilled steel orders, bank clearings, etc., after a study 
of past cycles has seemed to indicate their value in anticipating or 
reflecting business trends, (b) Next, a period is selected which 
represents, at least in the mind of the compiler, "normal" business 
conditions. The indexes for this period are combined and assigned 
an index number, say ioo. Consequent changes, as reflected by the 

1 By S. P. Meech. 



THE ADMINISTRATION OF FINANCE 421 

indexes thus combined, are considered as representing a period of 
prosperity in case the index average rises above 100, liquidation and 
depression in case the index number is declining or falls below the 
100 "norm." (c) This composite index is typically visualized by 
means of a statistical graph, (d) Charts of the individual indexes 
usually accompany the composite chart. These charts show the value 
and weight changes (in dollars, pounds, etc.) of the individual indexes. 
(e) Frequent bulletins furnish illuminating discussions of the charts. 
The cause-and-effect phase of trends is given detailed attention and 
conservative policies are suggested. (/) Special investigations con- 
fined to particular lines of business or to particular problems are 
obtainable for an extra fee. 

If we examine these various services we find that from one of the 
best of them, for the price of $100 a year, the manager receives: (a) 
a monthly business review and index chart; (b) advance letters 
notifying of important changes in business conditions; (c) supple- 
ments containing special investigations in fields of general importance, 
e.g., railroads, steel industry, etc. This service makes use of three 
graphs: (1) the speculative graph — security prices and New York 
bank clearings — anticipating by from two to four months the change? 
in; (2) the industrial graph — wholesale prices, pig-iron production 
and bank clearings exclusive of New York — anticipating by from four 
to six months the changes in; (3) the banking graph — interest rates 
and loans and deposits of New York banks. 

Now let us take a case to illustrate the utility of these services to 
the manager. The executive who consulted them in late 19 19 
observed that business was approaching a period of liquidation. The 
charts indicated that the individual indexes which vary directly with 
prosperity were reaching new high levels and that those which vary 
inversely with prosperity were reaching new low levels. He found 
that bank reserves were dangerously low, interest rate going up, loans 
and deposits reaching enormous heights. He saw that stock prices 
and speculative trading in securities were cut short by the rise of call 
rates as money conditions tightened. He noted the decline of exports 
and the unfavorable condition of exchange rates. He observed that 
iron and steel production and prices were very high, that commodity 
prices were going up, but at decreased speed. The composite charts 
indicated a general trend in harmony with that shown in the individual 
indexes. Speculative graphs showing a tendency to decline, produc- 
tion graphs easing up, and banking graphs indicating enormous credit 



422 BUSINESS ADMINISTRATION 

expansion — all this raised the question as to how much longer the 
orgy of speculation and spending would continue. The bulletins 
sounded warnings by pointing out that retail demand was slackening, 
due to the inability of wages, salaries, and interest incomes to keep pace 
with the cost of living. The decline of foreign demand was empha- 
sized and the long-run effects of the world's economic recovery and 
unfavorable exchange rates on export markets for our agricultural 
and manufactured products stressed. The relation of foreign demand 
and farming prosperity, now that bumper crops were assured, indi- 
cated that prices of farm products were due for a fall. The increased 
supply of raw materials in various lines was said to indicate the return 
of somewhere near pre-war conditions of supply and demand and 
hence of price. The dangerous conditions of bank reserves were 
pointed out, and the warnings and pleas of the Federal Reserve Board 
that expansion must stop and that loans must be curtailed brought 
prophecies of tight money and deflation as a necessary consequence. 
Purchasing agents in particular lines were warned to go slowly in 
buying and to work off inventories on their shelves as steadily as 
possible. Weekly reports of demand for goods and supplies of 
materials indicated that an adjustment of the two forces at a lower 
price level was a matter inevitable sooner or later. 

In the light of these facts and predictions several steps might well 
have been taken: (i) Expansion policies might well have been cur- 
tailed, for fixed capital costs were too high, due to high building costs, 
high interest rates, and approaching liquidation. Furthermore, large 
and high-priced inventories become unliquid very quickly once 
demand goes on a "buyers' strike." The need was for a reduction 
of inventories to avoid depreciation. (2) Cash should have been 
conserved and strengthened and bank loans paid off. (3) Long-time 
financing at high rates should have been postponed, if possible, and 
the issue of short-term notes avoided lest they come due at a time 
when sales are at a low ebb and collections slow. 

The foregoing are merely suggestive of some of the policies that 
might have been profitably pursued in the face of conditions which 
the data furnished by the services indicated. It goes without saying 
that the facts of each case and the conditions prevalent in each 
industry should determine any policies adopted. 

The services may be regarded as labor-saving devices lightening 
the job of keeping up with changes in price trends. Information 



THE ADMINISTRATION OF FINANCE 423 

otherwise impossible to secure may, through the specialization which 
has occurred, be placed in the executive's hands in time and in such 
a shape as to be immediately useful. 

9. AN OMNIBUS FINANCIAL INSTITUTION, THE 
TRUST COMPANY 1 

The usual functions of a trust company are: banking in a more 
or less limited form, execution of corporate trusts, execution of 
individual trusts, care of securities and valuables. In addition, 
other functions are sometimes exercised, such as life, title, and fidelity 
insurance, and the business of becoming surety. The earlier com- 
panies in the United States were chartered to manage individual 
estates only and to act in certain fiduciary capacities; the recent 
development of the trust company has been in the direction of banking 
functions and corporate trust business. 

Banking. — The banking functions of trust companies may include 
any or all of the following: 

The receipt of money deposits payable on demand and subject 
to check, or payable at a fixed date, or according to special agreement. 
Interest is usually allowed on all deposits above a fixed maximum 
amount or on the total sum. 

Money advances secured by the hypothecation of stocks, bonds, 
life insurance policies, bonds and mortgages, or other personal 
property. 

Real estate loans, secured by bond and mortgage. It is customary 
to loan not over two-thirds of the value of improved property; when 
the property is unimproved, not more than half. 

Discounting paper is engaged in principally by companies trans- 
acting a commercial banking business. The purchase of unsecured 
paper is permitted in some states where discounting is not allowed. 

The purchase and sale of securities. 

Trust companies sometimes guarantee issues of bonds, or at 
least set their stamp of approval upon them. 

The issue or guarantee of letters of credit, and the transaction of a 
foreign exchange business. 

The care of savings deposits. For this purpose a separate depart- 
ment is usually maintained. 

1 Adapted by permission from F. B. Kirkbride and J. E. Sterrett, The Modern 
Trust Company, passim, pp. 5-6. (The Macmillan Company, 1905.) 



424 BUSINESS ADMINISTRATION 

Corporate trusts. — Among the most important functions of a 
trust company are those relative to the business of other corpo- 
rations. 

As trustee under corporate mortgages and trust deeds, the trust 
company acts for the bondholders. It is customary for it to authenti- 
cate each bond issued subject to the provisions of the mortgage, to 
represent the bondholders in case of default, and to exercise such 
other functions as may be provided in the mortgage. 

As trustee under mortgages securing bond issues, the title to 
the mortgaged property is vested in the trust company for the benefit 
of the security holders. The corporation owning the mortgaged 
property retains physical possession of it so long as the terms of the 
obligation are complied with, except in the case of securities pledged, 
which are usually lodged with the trustee. In case of default, how- 
ever, it devolves upon the trustee to protect the interests of the bond- 
holders, and this may necessitate the foreclosure of the mortgage and 
sale of the property. 

As fiscal agent it dispenses coupon and interest payments on 
bond issues, and dividends on stock. It receives sums set aside 
as sinking funds to provide for the retirement of obligations at 
maturity, or when bonds are subject to redemption, draws the specified 
amount by lot and pays the principal. 

As registrar the trust company authenticates certificates of 
stock and bonds in order to prevent an over-issue, and to reduce the 
chance of loss or theft. As transfer agent, the company attends to 
perfecting transfers of ownership for stock and bond issues or parts 
thereof. 

As manager of underwriting syndicates, the trust company issues 
the prospectus and markets the securities of corporations which are 
being launched, or of established companies which are putting out 
new securities. 

In railroad and other reorganizations, the trust company takes a„ 
prominent part, acting both as a depository for, and as a representative 
of, the committees which formulate and execute the plans of reorgani- 
zation. Its officers often have a large share in the preparation of such 
plans. 

As assignee and receiver, the trust company acts in the same 
capacity for corporations as for individuals and firms or partnerships, 
assisting in winding up insolvent businesses and in conducting embar- 
rassed ones. 



THE ADMINISTRATION OF FINANCE 425 

Individual trusts. — The execution of individual trusts is the func- 
tion originally assumed by trust companies. The various other 
forms of business which are now engaged in, have, with the exception 
of life insurance, been later developments of the trust company idea. 
The earliest power granted these companies was to receive moneys 
or other property, real or personal, in trust. The trust company 
now also acts as executor and administrator of the estates of decedents. 

The trustee's duty in investing the funds is a double one; namely, 
to invest them securely so that the principal shall be preserved intact, 
and to invest them as productively as possible under his powers, so 
that they shall yield the best rate of interest obtainable for the benefit 
of the person or persons entitled to the income. He must hold the 
scales evenly, regarding scrupulously his duties to all beneficiaries. 
The popular idea that security is the only consideration is erroneous, 
as the trustee is equally bound to invest the funds as profitably as 
possible and cannot neglect one duty more than the other. 

Other functions. — The trust company acts as guardian, curator, 
or committee of the estates, and, in some states, of the persons of 
minors, those who are insane or mentally incompetent, spendthrifts, 
drunkards, and any other persons not legally qualified to take charge 
of their own affairs. In the case of a minor, the trust terminates on 
the ward's becoming of age; in other cases, when the disability is 
removed, or in accordance with a decree of court. These appoint- 
ments are frequently made by order of court, and to it accounting 
must be made. In some states the company is styled "conservator" 
when caring for the estates of persons of unsound mind. 

10. SOME INSTITUTIONS USED INDIRECTLY BY 
THE MANAGER 

A. INSURANCE COMPANIES 1 

[The life insurance company is here taken as typical of all such 
institutions.] 

From a financial point of view the life insurance company is a 
device for accumulating savings which shall be returned, not to the 
man who saves, but to his heirs at his demise. Some of the insured, 
it is true, die long before the sum of the premiums they have paid 
equals the sum that the insurance company has agreed to pay at their 

1 Adapted by permission from A. S. Johnson, Introduction to Economics, 
pp. 320-21. (D. C. Heath and Company, 1909.) 



426 BUSINESS ADMINISTRATION 

death. On the average, however, the insured live long enough so 
that their premiums, together with the earnings of the capital which 
those premiums form, are at least equal to the sums which the insur- 
ance company pays out in death claims. 

It is obvious that in a country like the United States, where life 
insurance is exceedingly common, immense sums of money must be 
collected by the companies every year to be held as a reserve against 
death claims. As the business of life insurance is steadily growing, 
the funds accumulated by these companies are also increasing. The 
annual receipts of practically every important life insurance com- 
pany exceed the annual disbursements. Accordingly, a life insurance 
company may invest its funds without much regard to the possibility 
of turning its investments into cash at short notice. It is important, 
however, that the business should be conducted in a conservative 
manner, since the failure of an insurance company would be a more 
widely felt calamity than the failure of almost any other business 
enterprise of equal magnitude. The loss would be borne in the end 
largely by the dependents of propertyless men. 

The reserves of life insurance companies are largely invested in 
real-estate mortgages, in state and municipal bonds, and in the bonds 
of railway, commercial, and industrial corporations. Stock invest- 
ments have often been made by insurance companies, but the practice 
is now generally regarded with disfavor, since the values of stocks 
are likely to show a wide range of fluctuation. 

B. THE SAVINGS BANK 1 

The chief business of a savings bank is to receive deposits, invest 
them in certain classes of securities specified in the statute, and pay 
to the depositors the amount due them, either in whole or in part, 
as they may from time to time demand. 

We can distinguish a savings bank very clearly by this "hall 
mark": If it receives money not subject to check but payable on 
presentation of pass book and due notice, which pass book by its 
terms constitutes the contracts of deposit, and invests the funds 
in mortgage loans and certain legalized bonds, collateral and personal 
loans, it is a savings bank; if, on the other hand, it discounts com- 
mercial paper, handles checking accounts, loans on notes of hand — 
in short, does a " commercial" business, it is not a savings bank. 

1 Adapted by permission from W. H. Kniffin, The Savings Bank and Its 
Practical Work, pp. 1-83. (The Bankers' Magazine, 1912.) 



THE ADMINISTRATION OF FINANCE 427 

The services rendered by the savings bank are many and varied; 
but as a broad statement it may be said that it acts first, as a vast 
collector of wealth, a storehouse, as it were; and, second, as a great 
distributor of wealth. Like a sponge, it must first gather in before 
it can give out. In its ingathering it serves the individual, and in its 
distribution it serves the individual, the community, and the state. 
It is, perhaps, the greatest assembler of money the world knows, and 
is one of the chief sources of available capital for municipal and cor- 
porate enterprises. 

The investments of the savings banks of this country may roughly 
be classified into: first, government bonds; second, state bonds 
(usually with a provision that default shall not have occurred within 
a certain time); third, mortgage loans (which are quite universal); 
fourth, city, county, town, and school district bonds (particularly 
of the state in which the bank is located, and frequently in other 
states, with stipulations as to the population and the debt) ; fifth, 
railroad bonds; sixth, street railway bonds; seventh, corporation 
bonds; eighth, bank stock; ninth, corporation bonds and stocks; 
tenth, collateral loans; eleventh, personal loans; twelfth, commercial 
paper; and thirteenth, miscellaneous investments. 

C. STOCK EXCHANGES 1 

Much that is to be condemned appears in their conduct. But 
they are after all productive institutions. They play useful, almost 
indispensable, roles in the economic order. Their most important 
function is to render more efficient the capital of the country. 

a) They make investment easy. 

b) They make withdrawal from an investment easy, and, in so 
doing, make capitalists more disposed to invest. 

c) They bring together all classes of investments, make clear their 
disadvantages, and so appeal to all classes of investors, e.g., those 
who wish above all security; those who demand a chance for large 
returns; those who can wait indefinitely for returns of any sort; etc. 

d) They make the properties represented in stocks and bonds per- 
fectly available as a basis for loans. (Banks will readily accept such 
bonds and stocks as security, seeing that there is a continuous and 
unlimited market where these properties can be disposed of at almost 
any moment.) 

1 Adapted by permission from F. M. Taylor, Principles of Economics, pp. 295-96. 
(University of Michigan, 1916. Later published by the Ronald Press Company.) 



428 BUSINESS ADMINISTRATION 

e) It is worth noting that the stock market furnishes government 
with the best available clue to the value of corporate properties when 
these are needed for the purposes of taxation or social control. 

D. WALL STREET 1 

New York is the gateway of the nation's commerce, and Wall 
Street has been likened to a toll-gate, to pass which every product of 
the country must pay tribute. As no one likes to pay toll, this would 
account for much of the animosity so often manifested against the 
financial center. Yet someone must make, maintain, and operate 
the various agencies by which the products of the country reach the 
markets, and it is right that the service should be paid for. 

Wall Street is the directing head of the great system of transpor- 
tation, using that term in its broadest significance, as including, not 
only the railroads and steamships, but also the banks and exchanges, 
and all the other manifold agencies by which the products of the soil 
are brought to the homes of consumers in forms fit for human use. 
Wall Street, in its financial machinery, facilitates the natural flow of 
money, provides the means for the promotion of enterprises, safe- 
guards and assists the movement of commerce, and maintains that 
system of credits by which a tenfold power of service is given to every 
dollar. 

By the machinery of its stock market it promotes the diffusion of 
wealth; it makes possible for great capital to be accumulated for vast 
undertakings, governmental and private, too big for individual effort; 
it enables a multitude of small capitalists to become partners in these 
big enterprises, by its agencies for the distribution of securities from 
the hands of producers into the hands of investors as the ultimate 
consumers; and it is able by its speculative machinery to anticipate 
human needs, and to secure a more even and equitable level of prices. 
For this work it must be paid; call it a fee if it be regarded as pro- 
fessional service, call it a toll if it is thought to liken Wall Street to a 
gate, or a tax if one prefers to speak of Wall Street as exercising 
legislative power, or a price if it is thought more proper to regard 
Wall Street as a merchant selling credit and securities for the most 
they will bring. But whether a fee, a toll, or a price, it cannot be 
disputed that Wall Street earns a reward for an indispensable service. 

Wall Street is the seat of (i) the stock market; (2) the money 
market. Each is distinct from the other, but both are interdependent. 

1 Adapted by permission from S. S. Pratt, The Work of Wall Street, pp. 45-48. 
(D. Appleton and Company, 191 2.) 



THE ADMINISTRATION OF FINANCE 429 

The stock exchange is the head of one and the bank clearing-house 
of the other. 

The stock market is a place where securities may be bought or 
sold (a) for investment; (jb) for speculation. 

The money market is in four main divisions, all closely allied to 
each other and having many subdivisions: (a) foreign exchange, by 
which the operations of international enterprise and international 
commerce are financed; (b) domestic credits, by which, through 
checks and commercial paper, food and merchandise are marketed and 
the manifold needs of inland trade cared for; (c) promotion, by which 
corporate and other large enterprises are created, underwritten, and 
financed; (d) stock-exchange loans, both on call and time, by which 
investment and speculative transactions in securities are made 
possible. 

C. Financial Policies and Occasionally Used Devices 

We saw in the preceding section the institutional life which the 
manager may use in his financial problems. In Section C and in the 
succeeding section we shall be concerned with an account of how 
the manager works out his policies, by way of various technical 
devices, through these institutions — or at least largely through them. 

As a means of facilitating our discussion, this material is arbi- 
trarily divided into two parts. The first part (treated in the present 
section, pp. 429-69) is given to a study of the manager's use of 
relatively infrequently used devices, such as stocks and bonds, in 
the working out of his financial policies. Stated another way, it is 
given to a study of some of the ways by which the manager raises, 
expands, and contracts capital. No one should gather from this 
statement, however, that the expanding or contracting of capital is 
an infrequent thing. Quite the contrary, rluctation of capital is the 
characteristic thing in a going concern. How true this is will be 
clearer after we have studied Section D (pp. 469-512). For the 
present, let us be aware that we are now examining the devices which 
are used relatively infrequently in bringing about shifts in volume of 
capital. 

The method used in presenting the material of Section C is as 
follows: The discussion opens with Selection n, which gives a general 
view of what is meant by capital, capitalization, and the various 
theories of capitalization. Selections 12-17 then present an account 
of the various kinds of corporate securities, treating them as devices 



430 BUSINESS ADMINISTRATION 

of which the manager makes use. The remainder of the section 
(Selections 18-22) is devoted to a study of some of the more important 
financial policies which may be worked out through the corporate 
securities. On all of these subjects we must, in such a rapid survey, 
be content with the "sampling" method. We look at one significant 
sample after another of both devices and policies. 

Partly because of the dominant position of the corporation in 
our business life and partly because corporate policies and practices 
can without great difficulty be " translated' ' into policies and practices 
for a partnership or an individual proprietorship, the material of this 
section bears primarily upon problems of corporate finance. The 
student will have little difficulty in applying the principles involved 
to the other forms of the business unit. 

PROBLEMS 

1. Make a list of "theories" or "bases" of capitalization of corporations. 

2. "Overcapitalization means capitalization over and beyond proper 
capitalization." Grant it. What is proper capitalization ? 

3. Explain what is meant by saying that the issuance of stocks and bonds 
is a contractual matter. 

4. Where can one find the "terms of the contract" under which a certain 
stock is issued? Is it on the stock certificate? In the corporation 
charter ? 

5. What is meant by "the law of the land" ? Does it refer to the char- 
ter ? To the companies act of the state ? To the state constitution ? 
To the general body of contract law ? To the common law ? 

6. "On pressing the inquiry, we are able to find several main formative 
influences which explain the various developments of corporate capitali- 
zation. The desire to apportion the elements of risk, income, and control 
involved in an enterprise largely accounts for the numerous forms of 
securities." Explain. 

7. It is generally said that stocks represent ownership and bonds repre- 
sent a loan made the company. Is "ownership" a single, absolute, 
matter or may there be "grades" of ownership? Could bonds have 
voting power ? 

8. The students should know the meanings of the following terms: capitali- 
zation; capital; shares; stock certificates; preferred stock; cumulative 
preferred stock; participating preferred stock; convertible stock; 
guaranteed stock; special stock; overissued stock; unissued stock; 
founders' shares; outstanding stock; watered stock; authorized 
stock; redeemable stock; deferred stock; treasury stock; non- 
assessable stock ; full-paid stock. 



THE ADMINISTRATION OF FINANCE 431 

9. Classifications depend upon points of view. Draw up a diagrammatic 
classification of stocks. Try to weave in the foregoing terms. 

10. The student should know the meanings of the following terms: 
mortgage bond; first mortgage bond; junior bond; senior bond; 
overlying bond; underlying bond; prior lien bond; income bond; 
debenture; participating bond; profit-sharing bond; joint bond; sink- 
ing fund bond; terminal bond; divisional bond; collateral trust bond; 
refunding bond; deferred bond; extension bond; extended bond; 
optional bond; gold bond; serial bond; convertible bond; registered 
bond; coupon bond; improvement bond; lottery bond, drawn bond; 
branch line bond; receivers' certificates; land grant bond; guaranteed 
bond; dividend bond; interest bond; purchase money bond; car 
trust bond. 

11. Draw up a diagrammatic classification of bonds. Try to weave in the 
foregoing terms. 

12. Define par value; face value; real value; market value. Is there any 
fixed relationship between par value, and market value ? 

13. "Where the preferred shareholders are in the minority they should see 
to it that their stock is cumulative." Why? 

14. "By this time the reason must have become clear for the veto power 
so frequently given preferred stocks, requiring the assent of preferred 
shareholders to any increase in bonds or preferred; or, generally, the 
purpose of the veto given any class of security on an increase in the 
amount of that class or any class having a prior claim on earnings or 
assets." What are these reasons ? 

15. How does preferred stock facilitate reorganization after bankruptcy? 
incorporation of a business heretofore conducted as a partnership? 
forming industrial consolidations ? 

16. Which would you rather have: common stock or preferred stock? 

17. Do you understand that corporate securities may properly be issued to 
secure working capital ? 

18. "The more shareholders there are in a particular corporation the fewer 
the shares that can control." Explain. Is this always true ? 

19. "There are cases where a corporation may ask no further payments 
on stock from its stockholders, but where creditors of the corporation 
may demand them." Explain. Remember stock certificates repre- 
sent contracts. 

20. What factors determine the amount of capital stock of a corporation ? 
the amount of bonds ? 

21. What is a deed of trust in connection with a bond issue? What does 
it contain ? 

22. Define or explain: closed mortgage; open end mortgage. In the case 
of the open mortgage, protection of the investor should be cared for. 
Why? How? 



432 BUSINESS ADMINISTRATION 

23. "Whether bonds shall be issued under an open or a closed mortgage 
presents another consideration of marketability. Doubtless the 
investing public generally prefers a closed mortgage." Why ? 

24. When is it appropriate to use a sinking fund ? How can one determine 
the amount which should be devoted annually to the sinking fund? 

25. "The desirability of any given plan of amortization may be tested by 
the following five considerations: (a) adequacy of the sinking fund or 
redemption payment; (b) certainty of payments; (c) reasonableness 
of the distribution of the burden upon the corporation; (d) effect of 
the plan upon the market for the bond; (e) expense and labor involved 
in the plan." Illustrate each point. Should every corporation have 
a sinking fund ? 

26. "We should remember, however, that paying the creditor and paying 
the debt are very different matters." Explain. 

27. What are the advantages and disadvantages of convertible bonds? 

28. Why are there so many kinds of bonds ? 

29. "Why do corporations borrow? Why create a debt, which must be 
repaid with interest, when the sale of additional stock would bring 
funds permanently into the business without a fixed liability for 
interest ?" Answer the question. 

30. Is it a good or a bad indication concerning a company when it decides 
to issue bonds ? 

31. A corporation has outstanding $1,000,000 of 5 per cent bonds, 
$10,000,000 of 7 per cent preferred stock, and $10,000,000 of common 
stock. Gross annual earnings are $11,950,000; total expenses for the 
year are $9,900,000 in addition to depreciation of the plant amounting 
to 10 per cent on a valuation of $11,000,000. What is the amount 
available for distribution among the security holders, and how will 
this amount be distributed among the holders of different securities? 

32. In the case of the corporation described in the preceding question what 
would be the effect upon the dividends of the common stock if all the 
preferred stock were converted into 5 per cent bonds ? Would this be 
a wise move if the business were likely to fluctuate so that the net 
earnings of the corporation would be cut in half ? 

33. A, B, and C are the owners of patent right, which A secured, B and C 
being his financing partners during the developmental period. It is 
estimated that probably $40,000 will be necessary to build the plant 
to manufacture the article, and $15,000 more will be needed for working 
capital. There is considerable probability of expansion, if the article 
"takes." It is proposed to create a corporation, and sell the patent 
to the corporation for stock; and also sell stock to outside investors 
to obtain developmental capital. What in your judgment should be 
the amount of capital stock issued ? Upon what factors would the 
amount depend ? 



THE ADMINISTRATION OF FINANCE 433 

34. "There is money market for acquiring loans of capital to carry on the 
business but there is no money market for original capital." Do you 
agree ? 

35. What is a reorganization? How can it be true that after reorganiza- 
tion of a corporation there may be outstanding a greater volume of 
securities with a smaller annual fixed charge ? What is the difference 
between fixed charges and contingent charges ? 

11. THE MEANING OF CAPITAL AND CAPITALIZATION 

There is no standard meaning for either of these terms, as tar as 
the business world is concerned. One useful definition of capital is 
"the net assets of the business that have been contributed for con- 
tinuing use." Even with this definition one must be on his guard. 
Sometimes the term is used in the sense of the money value of these 
net assets; sometimes in the sense of the "capital goods" themselves. 
We may use the term capitalization to mean the corporate securities, 
stocks, bonds, and (sometimes) short-term notes. This use is arbi- 
trary and is adopted merely to meet our peculiar needs. 

What is "proper" capitalization for a corporation? To this 
question also there is no short satisfactory answer. We may speak 
of various "bases" of capitalization. (1) There is the theory that 
capitalization should be based upon the original cost of the property 
or the actual investment in the enterprise and that the corporate 
securities should not exceed this amount. (2) There is the theory 
that capitalization should be based upon the cost of reproduction, and 
a variant of this is the theory that it should be based upon the cost 
of reproduction less the depreciation which has taken place. (3) 
There is the theory that capitalization should be based on earning 
capacity; that corporate securities may properly be issued to an 
amount which will equal an appropriate capitalization of earnings. 
There remains for debate whether actual or expected earnings should 
be taken as the basis. 

There are other "theories" or "bases" of capitalization, but the 
foregoing will serve to indicate the range of opinion and controversy. 
The issues are of more importance in the case of public-utility corpora- 
tions than in the case of ordinary competitive business. If business 
is really competitive, competition is relied upon to take care of the 
consumer, and protection of the investor becomes the main reason for 
regulating corporate issues. If the business is non-competitive, both 
consumers and investors may be interested in being protected. 



434 BUSINESS ADMINISTRATION 

An interesting illustration of capitalization occurred a few years 
ago when a large concern took over some smaller ones and in the 
process issued bonds to the value of the tangible assets of the concerns, 
preferred stock to an amount representing a capitalization of present 
earnings, and common stock to an amount representing a capitaliza- 
tion of expected future earnings over and above the present earnings. 



See also p. 456. Policies Concerning the Kind and Amount of 
Securities. 



12. CORPORATE SECURITIES VIEWED AS INSTRU- 
MENTALITIES 

A 

A person coming for the first time into contact with the multi- 
tudinous technical devices commonly used in corporate capital 
formation is likely to be somewhat dazed by the array of forms of 
stocks, bonds, and short-term notes. Bewilderment is not infre- 
quently followed by fascination and the next stage is an orgv of 
memorizing terms and factual descriptions in an attempt to see 
through these very captivating devices which become regarded as a. 
sort of symbol of business opportunity and success. And too many 
of our textbooks encourage such futility. 

It is far more helpful to approach the subject by another path. 
The truth is that stocks and bonds and other technical devices are 
technical devices which are employed in attaining certain objectives. 
Like most other devices they are moved about, shaped, and utilized 
as seems best. They have no invariable form; there is no one 
unvarying content in the names applied to them; there is no unchan- 
ging way in which each is utilized. They are instruments and they are 
molded as seems to the user best in view of the purposes he wishes 
to accomplish. 

These technical devices are at once robbed of much of their 
mystery if we recall to our minds the fact that, after all, they are 
merely symbols or evidences of contracts which have been entered 
into between the corporation and its owners or its creditors, as the 
case may be. Speaking broadly, such contracts may be entered 
into in any lawful way and may accordingly have an almost unlimited 
variety of forms. This shows at once how futile it is to try to cata- 
logue and perchance memorize all the attributes of, let us say, com- 



THE ADMINISTRATION OF FINANCE 435 

mon stock or preferred stock or mortgage bonds. These and other 
such names have come into use to symbolize certain rough types of 
such contracts, it is true, but the contracts are not invariable in form. 
There may be, for example, scores of variations in common stock or 
in any other one of these devices. About all one can say concern- 
ing the rights and obligations of the parties who have entered into such 
a contract is that their rights and obligations " depend upon the terms 
of the contract." 

Such a statement appeals to us at once as being true of ordinary 
contracts. Suppose you are to contract with Claire Louis for him 
to deliver you some apples for which you are to pay him. How 
numerous the variations might be in the details ! How many apples ? 
What kind ? When delivered ? Where ? What qualities ? At 
what price? When paid? How paid? These are but the begin- 
nings of a long list of possible issues. Well, after all wherein is this 
different from the case of Claire Louis contracting with a corporation 
to turn money over to it and the corporation agreeing to give Louis 
in return certain rights? How much money? When delivered? 
How delivered? What claims in return? Part ownership? Un- 
secured claims of an ordinary creditor for the repayment? Provi- 
sion that the corporation will lay aside earnings in order to be sure to 
repay? Provision that specific property shall be put in pledge? 
There is no end to the possibilities. 

Let us, for the present, brush aside details in an effort to see the 
problems of corporate securities in a large way. Let us say that 
the managers of a corporation have certain objectives in view. For 
example (1) they wish to secure funds to enlarge the business or 
(2) they wish to have the control of the corporation in certain hands. 
They set about having the corporation enter into contracts with 
various persons looking toward the attainment of these objectives. 
After these contracts have been drawn it may be said of them, for 
purposes of quick discussion, that they fall into rough types, but the 
only place in which one can find out precisely what a given contract 
provides is in that contract. New varieties of such documents emerge 
continually as new contracting parties find some new way desirable. 
The new forms emerge in response to the needs of the business com- 
munity; the needs of the business community are not straitjacketed 
into a lot of existing forms. It is helpful for a beginner to think of 
the matter in that light. If he does so think of it, he sees these 
technical devices as servants and not as masters; as a growing body 



436 BUSINESS ADMINISTRATION 

of instrumentalities through which the manager may work out his 
policies. 

All the foregoing may be summarized as follows: When a cor- 
poration issues stocks and bonds, it enters into a contract with the 
holders. The attributes of the particular security it issues (i) de- 
pend upon the terms of the contract and (2) this depends upon the law 
of the land. There is almost no limit to the variations which may be 
made in the contract. The variations which are made reflect policies 
of business and not respect for terminology. 

We must now take steps to see in this summary statement more 
than appears on the surface. In particular, we must put content 
into the sentence which says that the attributes of any given security 
depend upon the terms of the contract and this depends upon the 
law of the land. 

Let us begin by noticing that the corporation is an artificial per- 
son, permitted to exist under rules set forth by the government 
(either state or national, in the United States). It will help us to 
see the status of this artificial person more clearly if we think in 
terms of a somewhat extreme statement: " Natural persons may do 
anything they are not forbidden to do but artificial persons may do 
only those things they are permitted to do." It follows that a cor- 
poration may enter into such contracts in such manner as it is per- 
mitted by its creator, the government. Sometimes the rules governing 
a corporation are set forth in a special enactment of the legisla- 
ture applicable only to that particular corporation. This is called a 
special charter. Such charters were the usual way of creating cor- 
porations prior to 1850. Today, however, while special charters are 
occasionally granted, the ordinary procedure is this: The legislature 
passes a general act (the companies act or the general incorporation 
law, it is likely to be called) setting forth general rules governing all 
corporations which get charters under that act, and the actual 
granting of the charter is made an administrative act. It is per- 
formed, generally by the Secretary of State, according to rules laid 
down in the companies act. 

Suppose, now, that a corporation has been formed under the 
companies act of the state of Illinois, and that it has " issued" some 
stock of that general type known as " preferred." How could a 
person contemplating a purchase of such stock ascertain his rights 
and obligations ? Generally, such an investigation should be left to 



THE ADMINISTRATION OF FINANCE 437 

an expert, if much depends upon the accuracy of the outcome but 
in an ordinary case any layman can secure the main facts. To 
begin with, the outstanding features are Jikely to be set forth in the 
stock certificate. But even so, the stock certificate, if it is to be 
enforceable, must be drawn in conformity with the charter since the 
artificial corporation must act according to the rules governing it. 
Most of these rules will not appear in the charter; they will be found 
in the companies act. And there is much in the region back of the 
companies act. There is first of all the state constitution and for 
some purposes even the federal constitution. Again there is the 
great body of common law which is used to interpret any doubtful 
parts of the statute law (in this case a companies act) and which also 
fills in the inevitable gaps which will be found in any statutory 
statement. And, again, there may be some statutes other than the 
companies act which must be considered. "The terms of the con- 
tract" thus reach back far into "the law of the land," and only 
experts should be called upon to draft such contracts or to interpret 
them when much is at stake. 

What should this leave in a beginner's mind ? He should think 
of the law as an agency designed to give certainty to our relationships 
and should picture the corporation as a creature of the state brought 
into existence to meet needs. As a contribution to certainty, the 
contracts of this creature must be drawn according to the rules 
governing it but, within those rules, they may have the widest 
latitude. Do preferred stockholders have voting power? That 
depends upon the terms of the contract. Are their claims for divi- 
dends cumulative? Do they have preference on both earnings and 
assets (in case of dissolution) ? May their holdings be converted 
into common stock or into bonds and if so upon what terms? It 
depends upon the terms of the contract. 

Now, no one should hide behind a phrase. "It depends upon the 
terms of the contract" may not wisely be made a substitute for clean 
thinking. The student will accordingly be expected to know in 
general what each main type of security usually represents in rights 
and obligations. But he must realize that every case is a different 
case and that these contracts may be drawn to meet the needs of the 
case. The problem before a financial manager in a given instance is 
that of determining what should appear in the particular contract 
which he is causing to be drawn. 



438 



BUSINESS ADMINISTRATION 



B 1 

The corporate form immediately divides, or marks the line of 
division of management, into administration and control. Share- 
holders possess control, but through directors delegate administra- 
tion to officers. Varying rights given special classes of stock make 
a widely varying apportionment of income, control, and risk. Com- 
mon shareholders accept a maximum of risk in expectation of a 
maximum of income. They may share the incident of control 
equally or in varying proportions with other classes of stock. Shar- 
ing control in varying proportion does not mean here through unequal 
divisions in the total amounts of common and other classes of stock, 
but that each share of one class represents an essentially different 
amount of control from each share of the other. 

If two classes of stock enjoy exactly equal rights, except that 
one has a preference as to income and perhaps assets, they do not 
divide control, but risk, and the combination of control plus risk 
in one, as compared with the combination of control plus risk in 
the other, makes the ownership represented by one class entirely 
different from the ownership represented by the other. But the 
rights may differ, aside from the preference of one as to income and 
assets or either. 

We may speak of these divisions and combinations of income, 
control, and risk creating different kinds of ownership, as horizontal 
divisions. With that idea in mind we may make a diagram like 
this representing a simple case: 



CAPITALIZATION, $3,000,000 



>i, 000,000 common stock 

>i, 000,000 preferred stock 

>i, 000,000 first mortgage bonds 



Greatest risk: half present control; 

no limitation of income. 
Less risk: half present control; limited 

income. 
Least risk: little or no present control 

but contingent complete control; 

limited income. 



Now, if we make some further stipulations about this corporation, 
as that its net earnings are $200,000, that the preferred stock is 
6 per cent noncumulative, and that the bonds are 5 per cent, without 

1 Adapted by permission from W. H. Lyon, Corporation Finance, Part I, 
pp. 7"ii. (Houghton Mifflin Company, 1916.) 



THE ADMINISTRATION OF FINANCE 



439 



any rights of control contracted for except the right of foreclosure 
on default of payment of interest or principal, we can make the 
diagram a little more definite: 

CAPITALIZATION, $3,000,000 



$1,000,000 common stock 


Great risk: 50 per cent of actual 




present control; 45 per cent of 




present income which may increase 




in amount. 


$1,000,000 preferred stock 6 per 


Much less risk: 50 per cent of present 


cent noncumulative 


control; 30 per cent of present 




income, which cannot increase in 




_ amount. 


$1,000,000 5 per cent first mortgage 


Least risk : no actual present but full 


bonds 


contingent control: 25 per cent of 




income which cannot increase in 




amount. 



We have not yet mentioned another division of ownership, that 
represented by the number of shares of stock or the number of bonds. 
Though, in practice, corporation financing carries this division much 
further than private financing, the division itself is not peculiar to 
the corporate form. It appears in the partnership as complete in 
its nature as in a corporation, and makes a division into amount of 
ownership rather than kind — into quantity rather than quality. To 
carry out the metaphor of a horizontal division as indicating a 
division into kinds of ownership, we may call this division indicating 
quantity of ownership a perpendicular division. 

Further, to carry the metaphor into a diagram with the same 
facts as before, we have: 



























Common stock, par, $100. 
Ownership divided into 
10,000 parts. 
































Preferred stock, par, $100. 
Ownership divided into 
10,000 parts. 






Bonds, par, $1,000. 
Ownership divided into 
1,000 parts. 



Now, these two kinds of divisions of ownership accomplish two 
very different results. The perpendicular division of amounts of 



440 BUSINESS ADMINISTRATION 

ownership makes possible the fitting of every man's pocket-book or 
financial ability. As already stated, however, this is not peculiar 
to the corporation. A partnership can accomplish it, and to a 
limited extent in practice has accomplished it. One of three or 
more partners may have one-third or one-fourth or any other frac- 
tional amount of the total ownership. Nothing in the nature of a 
partnership prevents this from being carried very far, possibly even 
so far as the quantity divisions of ownership in the United States 
Steel Corporation or the Pennsylvania Railroad, whose security- 
holders number tens of thousands. 

The horizontal division into kinds of ownership makes possible a 
more difficult fitting than fitting a man's pocket-book. It makes 
possible the fitting of his type or state of mind. One man may be 
more or less willing to take a chance than another. The same man 
may be more willing at one time than another. He may be unwilling 
to take any risk whatever without having some control. 

We cannot consider corporate financing apart from ownership, 
nor ownership apart from owners. Ownership and owners enter 
into the consideration as necessarily as the various gases enter into 
the composition of water. Personal ownership has not developed the 
ability to fit types and states of mind closely. The fact that cor- 
porate ownership has, accounts for a great part, perhaps for the 
greatest part, of the success of the corporate form of enterprise. 



See also p. 734. The Powers of Stockholders. 

p. 671. Elimination by Combination of Risks. 



13. A CLASSIFICATION OF STOCKS 1 

[While the student cannot at this time do better than make 
intelligent guesses, he should read this selection with these questions 
constantly in mind: Under what circumstances should the manager 
use this kind of stock? What financial policy has the manager 
adopted if he issues this kind of stock ?] 

In the first place, stock certificates may be classified according 
to their par value. The great majority of important railroad, indus- 
trial, and financial corporations have issued stock with a par value of 

1 Adapted by permission from J. Adams, Jr., "Stocks and Their Features — 
A Division and Classification," in Annals of the American Academy of Political 
and Social Science, XXXV (19 10), 325-44. 



THE ADMINISTRATION OF FINANCE 441 

$100. According to the laws of most states, any par value whatever 
may be fixed for the stock. Consequently there are par values all 
the way from one cent, in certain mining and oil-well properties, to 
a few banks and trust companies, such as the Humboldt Savings 
Bank, and the Union Trust Company of San Francisco, and the 
West Side Bank of Milwaukee, each with shares of a par value as 
high as $1,000. 

Some stocks, strange as it may seem, have no par value whatever. 
The Adams Express Company, a voluntary association, dating from 
1854, has 120,000 shares of no stipulated par value, paying dividends 
of eight dollars per share annually. Similarly, the East Boston 
Company, a Massachusetts corporation going back to 1833, has 
150,000 shares of no par value. Several states have recently made 
provision for such stock. 

A further classification of stock certificates can be made with 
reference to their issue; i.e., into issued and outstanding, unissued, 
and treasury stock. Unissued stock is that which has been author- 
ized but not yet disposed of. It merely represents the right to 
admit new stockholders and has no value in itself. It has no active 
stock rights and is not an asset of the corporation. It usually is 
reserved for various corporate purposes, such as the conversion of 
bonds or the purchase of new lines or plants. Treasury stock, on 
the other hand, is best described by Wood in words which have 
been frequently quoted: It is stock "issued and outstanding which 
has come into the possession of the corporation which issued it by 
purchase, donation, or in liquidation of a debt. If it has been issued 
full-paid it remains so, even if sold again below par, and it is con- 
sidered an asset of the corporation for bookkeeping purposes. But 
such stock, so long as it is held by the corporation or its representatives 
as treasury stock, neither participates in dividends nor in the meet- 
ings of the corporation as treasury stock; though it still represents a 
paid-for interest in the property of the corporation." Treasury stock 
is issued, but is evidently not outstanding. Examples most fre- 
quently occur in mining companies. 

Stocks can also be classified according to whether they are full- 
paid or assessable. Full-paid stock is simply that which has been 
fully paid for as required by law in money, property, or labor. The 
certificates of such stocks are issued stamped " full-paid and non- 
assessable," and, in the absence of any special statute on the subject, 



442 



BUSINESS ADMINISTRATION 



carry with them no legal liability. Assessable stock, on the other 
hand, is that which has not been fully paid for by its subscriber. 
It should be emphasized, however, that outside of mining and public 
utilities corporations, assessable shares are comparatively few. Very 
few instances of such stock are listed on the New York Stock 
Exchange. The legal status of assessable stock is such that creditors 
of the corporation can hold the owners of the shares liable for the 
difference between the amount actually paid in and the par value 
of the stock. 

Turning next to a discussion of the various features of common and 
preferred stock, we find that the classification, to be complete, must 
be very elaborate. An outline is inserted to enable the reader to 
follow more readily the following classification. 

CLASSIFICATIONS OF STOCK CERTIFICATES ACCORDING TO 

THE RIGHTS AND LIMITATIONS ATTACHING TO 

VARIOUS TYPES OF STOCKS 



i. Common 
2. Deferred 



3. Preferred, as to 



Dividends (alvraW! / Cumulative (industrials, generally) 
Dividends (always) j Non-cumulative (railroads, generally). 



Assets 



Voting power 



Other features 



4. Stocks analogous to Preferred 

5. Debenture 



f Railroads (not often). 
\ Industrials (generally). 

f Exclusive (seldom). 
\ Special (often). 

f Callable. 
•I Convertible. 
[ Participating. 

{Interest-bearing. 
Special stock. 
Guaranteed. 
Founders'. 



"Common stock," meaning the junior issue, when there is pre- 
ferred stock, or stock analogous to preferred, sometimes has a real 
preference in regard to voting, for there are instances where the pre- 
ferred gives up the right to vote as a consideration for its receiving 
regular dividends. The usual provision is that if such disbursements 
are discontinued for a certain period, varying with the individual 
corporation, the preferred stock shall resume its voting power. 

Common stock generally has the right to receive all the surplus 
remaining for dividends after the preferred has been paid its stipu- 



THE ADMINISTRATION OF FINANCE 443 

lated percentage; and in a growing country such as the United States 
this feature is valuable, provided there is any worth in the company. 

Common stock usually has the right to share equally with the 
preferred in the corporate assets on the dissolution of the company. 
In many cases, however, especially the New Jersey industrials, which 
include practically all the large "trusts," the preferred stock has a 
preference in this respect. 

"Deferred" stock is an issue commonly used in England, but 
only infrequently met with in the United States. The name itself 
is largely explanatory of its nature. It is an issue in which divi- 
dends are deferred until dividends on some other variety of stock, or 
interest on some particular bonds, have been paid. 

Having explained the nature of deferred stock, we may now 
consider preferred stock. This class may have a preference in 
any one, any two, or all three, of three particulars; i.e., dividends, 
always; assets, generally, and voting power, at times. It may also 
be "callable," "convertible," or "participating." 

Such stock always has a preference over the common as regards 
dividends, which may be either "cumulative," or "non-cumulative," 
the former being in the nature of a fixed charge, because if the cor- 
poration is unable to pay the dividend in one year, it must be paid in 
succeeding years, together with the dividends for those years, before 
the common can receive anything. No such duty attaches to non- 
cumulative stock. If the dividend cannot be paid this year, the 
rights of the common to share in next year's earnings are in nowise 
impaired. 

The superior voting right which the common stock sometimes 
possesses has already been spoken of. The preferred, likewise, in 
some instances, carries the entire voting power, though not so often 
as the common, and generally in less important corporations. On the 
other hand the preferred stock often has a voting preference in regard 
to special matters — usually in case of the creation or increase of 
funded debt, or the enlargement of the preferred issue itself. More 
than a majority of the issue, usually two-thirds to three-fourths, is 
required to sanction such changes. 

Mention may be made here of the various classes of preferred 
stock, and the safeguard that is occasionally thrown around pre- 
ferred dividends in the shape of what may be called "dividend funds." 
The difference between a first and second preferred stock is this: that 
while both are senior to the common, the first preferred ranks ahead 



444 BUSINESS ADMINISTRATION 

of the second in regard to receiving dividends, and in some cases has 
priority as regards assets, also. Of the corporations whose stocks 
are active on the New York Exchange, only about 5 per cent possess 
two or more classes of preferred. No instance of a corporation 
having more than three classes of preferred stock has been found. 

It is proper to state here that what is commonly known as "pre- 
ferred" stock need not necessarily, in many cases, be called by that 
name at all. Under the laws of many states, stock possessing the 
characteristics of preferred stock may be known by almost any name, 
so long as that name does not generally import some other variety 
of stock. Concord & Montreal has its stock divided into classes I, II, 
III and IV, class IV corresponding to common stock. 

It should next be noted that preferred stocks may possess any 
one of three special features — they may be "callable," "con- 
vertible" or "participating." Very many preferred stocks are issued 
to procure money for corporate purposes on the inception of the com- 
pany, when not much could be realized by the sale of common stock, 
and bondo could be marketed only at a discount. Such companies 
may have hopes that in time their business will so improve that by 
issuing bonds at a low interest rate, or by selling additional common 
stock, they can retire the preferred stock, leaving the common stock 
in a much better position. Hence the callable feature may be inserted. 
This is never obligatory on the corporation, but merely optional with 
the directors. It is the opposite of the "convertible" feature, which 
depends on the stockholders' option. 

The participating feature of certain preferred stocks is compara- 
tively unknown to the public; yet it is of the utmost importance, for 
it is practically only in this class of preferred stocks that the holder 
has an income unlimited except by the company's earning power. 
In cumulative preferred stocks he is nearly always limited to his 
fixed percentage, but here he shares with the common stock the 
surplus remaining after a certain amount has been paid on that class. 

Following our classification of stocks we may now consider those 
stocks which are analogous to preferred. The first of these is interest- 
bearing stock which is really only another name for preferred stock. 

"Special stock" is a creation of certain Massachusetts statutes, 
especially the Acts of 1855 and 1882. Under the latter enactment, 
manufacturing ''and other corporations," by vote of three-quarters 
of their stockholders at a meeting called especially for this purpose, 
may authorize "special stock," which must never exceed two-thirds 



THE ADMINISTRATION OF FINANCE 445 

of the actual capital, bearing semi-annual dividends not exceeding 
4 per cent, and subject to redemption at par after a fixed date, which 
must be expressed on the certificate. The holder of such stock is in 
no case liable for the debts of the corporation. 

"Guaranteed stock" is a term properly applied to the stock of a 
company, the dividends on which are guaranteed by another cor- 
poration, provided there are sufficient earnings to meet them, but 
not otherwise. It is sometimes erroneously employed as describing 
preferred stock, i.e., the corporation guaranteeing the dividends on 
its own stock. 

"Founders' stock" is practically unknown in this country. No 
instance can be found in the manuals, though it may exist in small 
corporations. Briefly, it may be said to be stock ranking ahead of 
preferred, entitled to a certain fixed dividend and then to a certain 
proportion of the surplus after dividends on all classes have been 
paid. 

Having described the various classes of preferred stocks and 
their characteristics, and those analogous to preferred issues, there 
still remains for discussion the so-called debenture stock. This 
class of stock may be said to be on the margin between mortgage 
bond issues and regular stock issues. To the ordinary person a 
"debenture" signifies a non-mortgage bond. But it is also used to 
describe a stock. The whole amount secured may be "treated as 
borrowed capital consolidated into one mass for the sake of con- 
venience," and certificates issued entitling the holder "to a certain 
sum, part of this mass." It differs from stock in that the company 
promises, generally in the form of a covenant, to pay interest on 
specified dates. This interest has priority over dividends on any 
class of stock whatever, whether guaranteed or not. Such issues 
are common in England and Canada, but rare in the United States, 
though debenture bonds are well known here. 

In closing, we express the hope that intending purchasers will look 
well to the class of stock in which they contemplate investing, examin- 
ing all of the provisions of that particular issue; consulting, if neces- 
sary, the articles of incorporation of the company. 



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448 BUSINESS ADMINISTRATION 

15. A CLASSIFICATION OF BONDS 1 

A comprehensive basis for the classification of bonds is not to 
be found in the bond lists nor in current market reports. The names 
and classes thus arranged are for purposes of convenient reference 
and usually follow the practice of the local exchange. Generally 
speaking, bonds receive their titles from one or more of the fol- 
lowing characteristics: (1) the character of the corporation using 
them; (2) the purpose of issue; (3) the nature of security given 
for payment; (4) the terms of payment; and (5) evidence of owner- 
ship and transfer. The first of these five characteristics is used as a 
basis for general classification. That is to say, quotations are usually 
arranged under the following heads: 

Government — state and national. 

Municipal and county. 

Railroad, express, and steamship companies. 

Traction companies. 

Gas, electric light, and water companies. 

Bank and trust companies. 

Investment companies. 

Industrials. 

Mining companies. 

Miscellaneous, 

Classification according to purpose of issue. — Among the many 
varieties of bonds which take their names from the purpose of issue 
the following may be noted : 

Adjustment bonds, bridge bonds, construction bonds^ consoli- 
dated bonds, car trust bonds, dock and wharf bonds, equipment 
bonds, extension bonds, founders' bonds, ferry bonds, general bonds, 
improvements bonds, interim bonds, interest bonds, purchase money 
bonds, refunding bonds, reorganization bonds, revenue bonds, sub- 
sidy bonds, terminal bonds, tunnel bonds, temporary bonds, unified 
bonds. 

Classification of bonds according to the character of security pro- 
vided for payment. — From the point of view of the security given for 
payment, bonds fall into two general classes, viz., (1) unsecured, and 
(2^ secured. The secured bonds may again be divided into two 
general classes: (a) those having personal security, and (b) those 

Adapted by permission from F. A. Cleveland, "Classification and Descrip- 
tion of Bonds," in Annals of the American Academy of Political and Social Science^ 
XXX (1907), 400-411. 



THE ADMINISTRATION OF FINANCE 449 

secured by liens on specific property. These in turn may be sub- 
divided as follows: 

I. Unsecured 

a) Government bonds 

b) Corporate debentures 
II. Secured 

a) Personal security 

1. Indorsed bonds 

2. Guaranteed bonds 

(a) Guaranteed as to principal 

(b) Guaranteed as to interest 

(c) Guaranteed as to both principal and interest 

b) Lien security 

1. By character of property pledged 

(a) Real property 

(1) Land grant bonds 

(2) Real estate bonds 

(b) Personal property 

(1) Collateral trust bond 

(2) Sinking fund bonds 

2. By the character or priority of lien 

(a) First, second, or third mortgage bonds 

(b) General mortgage bonds 

(c) Blanket mortgage bonds 

(d) Consolidated mortgage bonds 

(e) Income bonds 

(/) Profit-sharing bonds 
(g) Dividend bonds 

3. By character of the holding participation receipts 

Bonds classified according to evidence of ownership and transfer. — 
Considered from this viewpoint there are three classes, viz., coupon 
bonds, registered bonds, and coupon registered bonds. 

Coupon bonds are issues, the contracts for payment of interest on 
which are evidenced by separate coupons or contracts for payment, 
which fall due consecutively on the interest-paying dates. The 
coupons may be detached and constitute cdmplete promissory notes 
in themselves, payable to bearer. The coupons are usually written 
on small sections of a sheet of paper attached to the principal obliga- 
tion and as they mature are clipped off and presented for payment. 



45° BUSINESS ADMINISTRATION 

They are frequently presented for payment through a bank as a 
check or draft would be. 

Registered bonds are credit instruments, the interest obligation 
in which is expressed in the same writing or paper as in a promissory 
note, the ownership of the bond being registered as a means of pro- 
tecting the payee against loss, necessitating a formal transfer and 
registration to transfer the title when the old instrument is canceled 
and a new one issued. Interest is payable by money delivery or 
by check sent by mail to the address of the registered holder. Notice 
should be given of any change in address. 

Registered coupon bonds are issues, the principal of which is regis- 
tered, the coupons being made payable to bearer. 

In practice a single bond issue may have any number of these 
many distinguishing characteristics, so long as they are not in con- 
flict. When applied to specific issues the number of classes may 
be equal to the mathematical possibility of the several elements 
described in combination. The advantage of the analytical classi- 
fication here used is that by classifying and defining bond character- 
istics the terminology may be understood in any combination used. 

16. RECITALS IN BONDS 1 

A bond ordinarily is simply a promise to pay money at a given 
time, bearing a rate of interest, the interest usually being payable at 
stipulated intervals — annually or semi-annually. Such a bond is 
sometimes defined as an instrument in writing, under seal, whereby one 
binds himself to pay a certain sum of money to another on a day named. 

The essential recitals to be made in a bond depend largely upon 
the statutes and laws governing the issue. It is necessary to have a 
knowledge of the statutes under which the bond is sought to be issued, 
in order to be sure of all the recitals which should enter into any 
particular issue of bonds. It is quite a common practice to select some 
bond form which has been evolved by long continued experience and 
adopt and copy such a bond. Such practice is much better than to 
approach the subject in a haphazard manner, but no bond form should 
be adopted without careful investigation of the authority by which it 
is issued and the conclusion arrived at that the bond complies in all 
respects with the authority granted. These observations apply to 

1 Adapted by permission from Andrew Squire, " Essential Recitals in the 
Various Kinds of Bonds," in Annals of the American Academy of Political and 
Social Science, XXX (1907), 248-56. 



THE ADMINISTRATION OF FINANCE 451 

what may be called the unusual recitals in bond forms. Some of 
these recitals are not essential, but at times the recitals, if they are to 
become part of the contract between the obligor of the bond and the 
one who buys it, are very essential, and it becomes very necessary 
to have the exact terms clearly expressed. 

A bond written in any unusual phraseology is liable to attract 
attention and raise questions that might hinder the negotiation and 
sale of a bond that would not attract attention if written in the ordi- 
nary terms. 

A bond secured by mortgage, whether real estate, chattel or 
collateral trust, should usually, in addition to containing the obliga- 
tion to pay, advise the bondholder, either directly or by reference to 
the mortgage, of his rights and of the terms and conditions upon which 
the bond is issued and secured. 

Ordinarily, a proper form of mortgage bond will set forth: 

a) An acknowledgment of the indebtedness for value received. 

b) A covenant to pay the principal at a certain place and time, 

in lawful money, or gold coin of a fixed standard of weight 
and fineness, with interest at an agreed rate, payable at a 
specified place, and at specified times, usually semi-annually, 
and ordinarily represented by coupons attached to the bonds. 

c) A description of the issue of which the bond is one, showing 

usually the amount of the issue, and, oftentimes, the pur- 
poses. 

d) A statement showing that the bond is secured by a mortgage 

or trust deed, as the case may be; the place where the 
instrument is recorded or filed, and a reference to the instru- 
ment for a description of the property mortgaged or pledged ; 
the extent and character of the security, and the terms and 
conditions upon which the bonds are issued. 
Usually the bond is specifically made subject to the terms and 
conditions of the mortgage, so that, should there be any conflict 
between the terms of the bond and mortgage, or instrument secur- 
ing the bond, the terms of the mortgage will govern. 

e) A recital briefly, advising the bondholder of his rights on default 

of payment of interest or otherwise. 
/) A provision that the bond shall not be valid until authenticated 

by a certificate endorsed thereon and executed by the trustee. 
This certificate to be executed by the trustee needs careful atten- 
tion. It should not be a certificate purporting to be anything more 



452 BUSINESS ADMINISTRATION 

than an identification of the bond as one of the bonds of that par- 
ticular issue. The trustee should never represent that the bond is 
secured by a mortgage or other instrument executed to the trustee, 
because the trustee is not expected to in any sense determine that 
the bond is secured, or to what extent it may be secured. All that 
is asked of the trustee is to identify properly the bond and guard 
against an over-issue. 

In addition to the foregoing there are various special provisions 
which frequently occur in bonds. For instance : 

i. A provision for registration. — This in order that the bond 
which is usually payable to bearer, may be registered and held so 
that the owner would not be deprived of his property, should the 
bond be stolen or destroyed by fire. 

2. A provision for redemption prior to maturity. — Such provisions 
are exceedingly common in railroad and corporation issues. Experi- 
ence has taught those who are in the habit of drawing bonds of this 
character, that almost every kind of business is liable to develop 
far beyond the expectations of those interested at the time a bond is 
put out; and that, in order to finance an increasing business, whether 
it be a railroad or even an ordinary corporate enterprise, upon which 
larger demands are being made yearly for capital to be used in the 
business, additional stock must be sold or additional bonds issued. 
Sometimes resort must be had to the one method and sometimes to the 
other. When it is found better to issue new bonds, it is frequently of 
great advantage to be able to retire the underlying bonds, and it is 
very wise that the bond should contain a provision permitting such 
retirement. As a matter of experience, the bond should usually 
provide for its retirement only at some interest-maturing period. 

3. For a sinking fund. — 'The sinking fund provision in a bond 
is sometimes a difficult one to deal with. [For a discussion of sinking 
funds, see page 462, Amortization Policies and Practices.] 

4. For the exemption of stockholders, directors and officers of the 
corporation from individual liability for the payment of principal and 
interest of bonds. — Provisions like this arise mainly from two causes : 
First, in the original promotion of many enterprises property which 
is of an uncertain value is, under a contract, turned over to a corpora- 
tion, sometimes accompanied with a money payment and sometimes 
without; sometimes in an undeveloped condition and sometimes in a 
developed condition, for a given number of bonds and a given amount 
of stock, all of which are issued as fully paid, and then the bonds and 



THE ADMINISTRATION OF FINANCE 453 

stock are put upon the market by the party making the proposition. 
If the enterprise turns out successful, no question arises, but if, as is 
not infrequent, the enterprise is a failure, and the property mortgaged 
will not sell for sufficient to pay the outstanding bonds, then the bond- 
holder (who is frequently an innocent person) looks to see if he cannot 
hold the original promoters, the stockholders, directors, and officers in 
some way, for any deficiency. To guard against being so held, recitals 
of the character suggested are frequently put in the bonds. 

A second reason for such a recital arises from the double statu- 
tory liability provided for in some of the states. The constitution 
of some states provides that all stockholders shall be liable for an 
additional amount up to the amount of the holding of their stock 
to pay the indebtedness of the corporation. Most states have no 
such provision, but wherever such provisions do exist they make 
trouble and give rise to a considerable amount of litigation. Such 
litigation it is sought to escape by a contract provision in the bond or 
mortgage. 



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156 BUSINESS ADMINISTRATION 

18. POLICIES CONCERNING THE KIND AND AMOUNT 

OF SECURITIES 1 

[The kinds of securities issued by a corporation will ordinarily 
be a compromise between the kind the company would like to offer 
and the kind investors would like to have. Be sure you get from 
this reading an appreciation of the part played by amount and stability 
of income.] 

The next question to consider is: What issues of securities or 
credit instruments should a corporation put out and what proportion 
of its total funds should be obtained by each of these issues? In 
order to raise funds from each of the four sources outside the business 
itself named above the corporation manager will offer: 

Sources Securities 

(a) To trade creditors Bills and notes payable 

(b) To banks Notes payable and endorsed notes 

receivable 

(c) To the investing public Mortgage bonds and perhaps 

preferred stock 
{d) To the speculative public Stock 

The amount of each security offered will depend in part on the 
assets and in part on the earnings of the corporation. 

Corporate assets in nearly every line of business fall naturally 
into six groups, as follows: 

(a) Fixed investments essential to the business, such as real 
estate, buildings and machinery, and in the case of holding com- 
panies, securities of subsidiary corporations. 

(b) Property that could be sold without breaking up the business, 
though the sale would probably be at a heavy sacrifice, such as, 
outlying real estate, securities of other companies control of which 
is not essential to the integrity of the corporation, raw materials, 
and goods in progress. 

(c) Finished products on hand. 

(d) Accounts receivable. 

(e) Cash. 

(/) Intangible assets, such as good-will, trade mark, etc. 

1 Adapted by permission from W. H. Lough, Corporation Finance, pp. 122-32. 
(Alexander Hamilton Institute, 19 16.) 



THE ADMINISTRATION OF FINANCE 457 

To the first five groups roughly correspond obligations for bor- 
rowed money, as follows: 

(a) Mortgages and mortgage bonds obtainable as a rule on good 
terms up to 60 to 75 per cent of the appraised value of real estate; 
50 per cent of buildings; 25 to 40 per cent of machinery; 50 to 90 
per cent of securities. 

(b) and (c) Income, profit-sharing and car-trust bonds, on a great 
variety of terms, preferred stock in some cases and to some extent 
short-term notes and bank loans. 

(d) and (e) Accounts payable and bank loans. 

Group (f) and the differences between the other assets and their 
corresponding liabilities are usually represented by stock issues and 
by surpluses. The reader will understand, no doubt, that this 
classification is merely approximate and is not always followed in 
practice; yet an analysis of balance sheets will reveal, on the whole, 
a close adherence by corporation managers to the principles just 
stated. 

The stability and amount of the earnings will, of course, greatly 
affect — in fact, determine largely — the value of a corporation's 
assets, and in that way will affect the amount and kind of securities 
that it may wisely issue. 

Now we take up the long-time obligations — especially mortgages 
and mortgage bonds — of corporations. Evidently they must be 
based on permanent, or fixed assets, and in amount will correspond 
roughly to the value of such assets. 

Here we meet with the difficult and important question, What 
determines the value of fixed assets ? Most people would be inclined 
to say that the cost of the assets must determine their value. A 
moment's reflection, however, shows this statement to be untrue. 
Suppose, for instance, that a man has put up a plant at an expense 
of $100,000 for refining copper, and afterwards discovers that there 
is no copper within hauling distance. The plant would not be 
worth the expense of demolishing it. Evidently cost of construction 
would have very little to do with the value of such assets. 

The second opinion is that the value of fixed assets is determined 
by the expense of duplicating them. It is claimed, for instance, 
that to arrive at a fair valuation of the railroad property of the 
United States, all we need to do is to figure how much it would cost 
to reproduce this property under present conditions. The illustra- 
tion already used, however, would apply in criticism of this second 
opinion as well. 



458 BUSINESS ADMINISTRATION 

The third opinion is that the value of fixed assets is determined 
by their earning power as in the above illustration. It takes no 
argument to show that this is actually the case in ordinary business 
practice. If you were going to buy anything in the nature of a 
fixed asset, from a university education to a steel mill, your first 
question as a business man would be, How much will this asset 
earn for me? Similarly, an investor in buying the securities of a 
corporation will inquire as to the value of the corporation's fixed 
assets, and will naturally estimate their value on the basis of earn- 
ings — not the present earnings altogether, but probable future 
earnings as well. 

Bear in mind that this principle that earnings determine value 
is applicable only to fixed assets. The selling value is applicable 
only to fixed assets. The selling value of floating assets, such as 
raw material, tools, finished goods on hand, is another matter. That 
will be determined, normally, as the science of economics explains, 
by cost of production. The difference arises from the fact that 
fixed assets — land, buildings, machinery — are not intended for sale, 
but for use. They generally have little or no value except for the 
purpose for which they were intended; and their value for their 
purpose can be determined only by their earning power. 

We have already intimated without going into details that the 
amount of investors' securities which may be issued by any corpora- 
tion depends both on the value of its fixed assets and on the amount 
of its income available for interest charges. There is no contradic- 
tion between these two considerations. At bottom the important 
factor on which to base bond issues of a going concern is the amount 
and stability of income. 



See also p. 433. The Meaning of Capital and Capitalization, 
p. 492. Short Term Loans and Trade Credit, 
p. 643. Chapter vii. Administration of Risk-Bearing. 



19. SOME POLICIES WITH RESPECT TO 
PREFERRED STOCK 1 

[Since the problem most frequently arising with respect to stock 
issues is concerning the wisdom of issuing preferred stock, this selection 
serves to open up a range of " policy questions" concerning stock 

1 Adapted by permission from W. H. Lough, Corporation Finance, pp. 77-79 
(Alexander Hamilton Institute, 1916.) 



THE ADMINISTRATION OF FINANCE 459 

issues. The student should be able to work out for himself rough 
answers to these questions: Under what circumstances should the 
manager issue cumulative preferred stock? Under what circum- 
stances non-cumulative preferred stock ?] 

Preferred stock had its origin in railroad reorganizations. In 
reorganization after bankruptcy it is necessary to cut down the 
claims of the various bond issues outstanding in order to put the 
reorganized corporation in a reasonably safe condition. The interest on 
the first mortgage bonds is usually scaled; some of the junior issues are 
perhaps turned into income bonds, and in the seventies some bright 
mind conceived the idea of changing the inferior bond issues into 
preferred stock. [See page 465, Corporate Reorganization Policies.] 

Although preferred stock was originally the offspring of receiver- 
ships, it proved to be such a useful instrument for some purposes 
that it has been retained and is now much used, especially by indus- 
trial companies. The railroad companies are gradually giving it up. 

Apart from its usefulness already alluded to in cases of reorgani- 
zation, preferred stock serves four other purposes. First, it may be 
a convenient means of separating a company's stock into different 
voting classes. Sometimes the preferred stock has no vote at all; 
sometimes it elects a limited number of directors. either case 

the owners of the majority of the common stock may elect a majority 
of the board of directors. Therefore, a much smaller interest will 
control the business than would be necessary if all the stock issued 
voted alike. 

Second, preferred stock is often very useful in forming industrial 
consolidations. As we shall see in the study of these consolidations, 
they usually capitalized for a great deal more than the combined 
capitalization of their subsidiary companies. Ordinarily the extra 
capitalization, which represents prospects, takes the form of common 
stock, and the present value of the plants and businesses absorbed 
is represented by bonds and preferred stock. The subsidiary com- 
pany stockholders are much more inclined to exchange their common 
stock for preferred stock in the consolidation than they would be to 
exchange for common stock. If the subsidiary businesses have been 
successful and profitable it is reasonable to expect that dividends on 
the preferred stock can be paid, whereas nobody can foresee whether 
common dividends will be paid or not. 

The third purpose of preferred stock is to facilitate the incor- 
poration of a business which has been conducted as a partnership. 



460 BUSINESS ADMINISTRATION 

In a partnership each partner has as much say with regard to affairs 
as any other partner, irrespective of the extent of his interest. It is 
true that in practice the senior partner usually controls, but in law 
they are all on the same footing. They may desire to preserve the 
same arrangement in the corporation, in which case they may create 
a non-voting common stock and assign that stock to each partner in 
proportion to his interest in the partnership and in addition may 
make a voting preferred stock, of which each partner receives an 
equal amount. In this case it is possible that the so-called preferred 
stock may have preference in nothing except voting power. 

Fourth, preferred stock obviously may attract conservative inves- 
tors who would not care to buy the more speculative common stock 
of a corporation. Preferred stock, in point of security, ranks between 
the lower grades of bonds, which are described in succeeding chapters, 
and common stock. The preferred stock of industrial corporations, 
on account of their fluctuating earnings, usually sells at much better 
prices than the common stock of the same corporations, even though 
the common stock may receive on the average as large or larger 
dividends. 

Sometimes a certain amount of stock will be set aside at the 
organization of a corporation and given voting power, which right 
is denied to all the other stock. In such a case the corporation has 
in existence two classes of stock, " voting" and " non-voting." This 
is not at all a common arrangement and is rarely, if ever, adopted 
except when a partnership business is put into the corporate form. 
It amounts to the same thing as creating preferred stock with the 
preference confined to the privilege of voting. 

20. POLICIES WITH RESPECT TO OPEN AND 
CLOSED MORTGAGES 1 

[Although the holder of bonds is primarily interested in the 
amount and steadiness of the income of the company whose bonds 
he holds, he has, in the case of mortgage bonds, a strong secondary 
interest in the character and amount of the property put in pledge. 
This selection gives a glimpse of how this pledging of property may 
be handled. The material in the latter half of the selection has 

x Adapted by permission from W. H. Walker, Corporation Finance, pp. 118-20. 
(Alexander Hamilton Institute, 191 7.) 



THE ADMINISTRATION OF FINANCE 461 

further value in that it also shows how steps may be taken to safe- 
guard the safety of bonds which have behind them no specific pledge 
of property. Remember that when a manager decides to issue bonds 
with any of the safeguards mentioned, his act reflects a financial 
policy. 1 

When a corporation is growing rapidly, and needs constantly to 
enlarge its capital by borrowing, the fact that its best assets are 
subject to the lien of a mortgage may render it difficult to borrow 
further on favorable terms. This is particularly true when the 
presence of the above clause prevents the new extensions or improve- 
ments themselves from being pledged under a new mortgage to secure 
additional funds. It is therefore customary, in railroad finance, and 
occasionally with other companies, either to provide a bond reserve 
or to execute an open mortgage, under which additional bonds may, 
from time to time, be issued to meet new capital requirements. 

When the property is valuable enough to sustain a mortgage 
beyond the immediate amount required, the company frequently 
mortgages the whole property and authorizes upon this security, an 
issue of bonds much larger than is immediately needed. These 
unissued bonds, available for sale at any time for new capital, or for 
pledge as collateral for temporary loans, constitute bond reserve 
for financing future extensions. 

When, however, the property is not adequate to create a satis- 
factory bond reserve, or future extensions ar< contemplated beyond 
the amount of such reserve, and cannot be financed on separate 
mortgage because of the after-acquired property clause, it is cus- 
tomary to issue an open mortgage. v closed mortgage is one under 
which a fixed amount of bonds may be issued and which carries no 
hen protection beyond that amount. An open mortgage is one 
which does not fix in advance the exact extent of the lien or the 
amount of the bonds that may be issued under it. 

The open mortgage always restricts the bonds issued under it by 
requiring the maintenance of an adequate margin of safety the 
value of the property above the par value of the bonds outstanding. 
The trustee is instructed not to permit the issue of additional bonds, 
unless this margin of safety is maintained, and certain definite 
requirements are imposed to insure this being done. The following 
are the more customary safeguards, and usually several of them are 
found in the trust deed: 



462 BUSINESS ADMINISTRATION 

(a) Investment of the entire proceeds from the sale of bonds in 
the productive property or equipment covered by the mortgage, or 
to retire maturing prior liens thereon. 

(b) No additional bonds to be issued while the floating debt 
exceeds a certain amount or a certain proportion of the total liabilities. 

(c) No additional bonds to be issued unless the earnings available 
for fixed charges have averaged for a certain period of time a certain 
excess above the interest requirements, including interest upon the 
contemplated new issue. 

(d) New bonds not to be issued above a certain maximum amount, 
or a certain amount each year. 

(e) No property to be sold without turning in to the trustee the 
full proceeds, or a certain portion thereof, to offset the reduced 
security, or to retire a portion of the bonds. 

(J) Maintenance of adequate reserves against depreciation, usually 
upon some stated basis. 

Open mortgages are rare. A bond reserve serves all the purposes 
of a limited open-end mortgage, and stands in better favor at the 
present time. Both require rigid restrictions of similar nature. 
The after-acquired property clause is now the general rule, especially 
in the large refunding mortgage issues of American railways, which 
are showing a strong tendency to clear away the numerous small 
underlying mortgages and provide ample bond reserves. It is 
clear that the bond reserve plan, especially if property is not adequate 
to secure the entire authorized issue in the beginning, must carefully 
restrict floating indebtedness, depreciation of the mortgaged property, 
and the investment of new funds in non-producing assets. 



21. AMORTIZATION POLICIES AND PRACTICES 1 

The security of a loan may consist of the market value of a 
product, structure, or natural resource, or of the earning power of a 
business. The bonding value of property of any kind is based upon 
its productive capacity, or "Value in use." An asset is worth only 
what it will produce. If, in the course of production, the value of 
the specific security declines, it becomes necessary that the bonded 
debt be retired at least as rapidly as the assets upon which it rests 
are consumed. Such assets are known as wasting assets. Any 

1 Adapted by permission from W. H. Walker, Corporation Finance, pp. 179-81. 
(Alexander Hamilton Institute, 191 7.) 



THE ADMINISTRATION OF FINANCE 463 

natural resource or stock of goods which is exhausted in the course 
of business is a wasting asset. 

Any specific structure or piece of equipment is a wasting asset, 
because deterioration caused by time or use, or both, is inevitable. 
On the other hand, a given lot of equipment which is being con- 
stantly replaced and improved so that its productive value as a 
whole is maintained, may not be considered as a wasting asset. 

The basis of amortization is therefore found in the nature of the 
security pledged, by allocating the causes of the wasting values. 
These causes are three in number: 

a) Depreciation in earning power, caused by time or operation. 

b) Reduction of assets by sales. 

c) Decline in value owing to changes in the market. 
Resulting from the nature of these causes, there are two bases 

of amortization: 

a) Upon the unit of time — debt amortized at a certain rate per 
year, or other unit of time. 

b) Upon the unit of production or sale — debt amortized at the 
rate of so much per ton of coal mined, per thousand feet of timber 
cut, per acre of ground sold, etc. 

To illustrate. — Bonds upon specific railroad equipment or single 
steamships usually mature serially, and are paid off in perhaps ten 
even annual payments, because time is the chief cause of their deterio- 
ration. Coal bonds are retired out of a fund accumulated at the rate 
of from three to five cents per ton mined, because production, which 
reduces quantity on hand, is the factor determining the diminution 
of the security. 

Failure to observe these underlying principles and to distinguish 
clearly between them has resulted in numerous unsuitable, and often 
unsuccessful, provisions for amortizing bonds. It should be observed 
that the first and third causes, above mentioned, possess a sufficient 
element of uncertainty to produce wide divergence of opinion. The 
rate of obsolescence, or market decline, is purely speculative in most 
cases. Frequent errors of judgment in the rate of amortization, 
therefore, often result, even when the governing principles are 
clearly recognized. 

Sometimes borrowers are hampered by arbitrary sinking-fund 
demands on the part of investors, who lacking faith in the future of 
the business, seek rapid amortization as a protection. The protec- 
tion that they should actually have, in such cases, is often not 



464 BUSINESS ADMINISTRATION 

amortization at all, but an intelligent policy governing capital invest- 
ments, maintenance, surplus and dividends. Bonds should never be 
amortized without good reason, but when amortization is necessary- 
its true principles should be recognized and applied. 

The desirability of any given plan of amortization may be tested 
by the following five considerations: 

a) Adequacy of the sinking fund or redemption payment. 

b) Certainty of payments. 

c) Reasonableness of the distribution of the burden upon the 
corporation. 

d) Effect of the plan upon the market for the bond. 

e) Expense and labor involved in the plan. 

It will be noted that the first two are for the protection of the 
creditors, and that the last three are important to the borrowing 
corporation. The creditor is interested in knowing that the plan is 
enforceable, the payments certain, and that the amortization pro- 
visions are ample to protect him against any decline in the value of 
the security. The borrowing corporation is interested in securing a 
just, gradual, and perhaps even distribution of its payments, so that 
it may be able to make them out of income without distress. The 
company also desires a plan which will involve as little inconvenience, 
uncertainty, and expense as possible, and which will enable it to 
market the issue to the best advantage. 

The methods of amortization may be summarized as follows: 

a) Retirement in series or by allotment. 

1. Bonds maturing serially. 

2. Periodical retirement by purchase in open market. 

3. Periodical retirement by allotment and advertisement. 

b) Redemption fund accumulated against maturity. 

1. Fund held by trustee in bank. 

2. Funds invested by the trustee in outside securities. 

3. Funds invested by the trustee in bonds of the same issue, 
which are kept alive in the fund. 

It is a good policy for a corporation to borrow, and for the same 
reason it is a good policy not to amortize the loan under any plan 
unless it is demanded by investors or by the nature of the risk. If 
the profit of the business of the value of assets is enduring enough to 
justify the expectation that the protection of the bondholders will 
remain constant or increase, it is usually unwise to provide for 
amortization. Serial repayment is a clumsy device, not frequently 



THE ADMINISTRATION OF FINANCE 465 

used when it can be avoided. Amortization by redemption fund is 
more frequent. 



See also p. 501. The Meaning of Depreciation. 

p. 506. Reserves and Other Uses of the Surplus, 
p. 854. Chapter x. Analysis of a Business Case. 



22. CORPORATE REORGANIZATION POLICIES 1 

[This selection is written with particular reference to corporate 
reorganizations in the railroad field. In principle, however, its appli- 
cation is general. It should be read not only to secure descrip- 
tive facts concerning reorganizations, but also with the mind searching 
for principles of financial administration in times of financial embar- 
rassment.] 

The term "reorganization" is used in this study to denote the 
exchange of new securities for the principal of outstanding, unma- 
tured, general mortgage bonds, or for at least 50 per cent of the 
unmatured junior mortgages of any company, or for the whole of the 
capital stock. These exchanges have been the essential features of 
the operations which have been described. This exchange of securi- 
ties must take place upon a considerable scale. 

The exchange of new securities for old on a large scale usually 
takes place when a railroad is unable to meet maturing obligations. 
But though impending insolvency is the usual occasion it is not the 
only one. Reorganization sometimes occurs when prosperity is too 
great as well as when it is too little. Or a management may desire 
to get rid of hampering restriction, or it may desire to manipulate 
conditions of control. This last named cause — the desire to manipu- 
late conditions of control — -has been fortunately an infrequent cause 
of reorganization. 

When bankruptcy has at last occurred, three groups of interests 
take part in the reorganization which must ensue. These are the 
creditors, who find interest and perhaps principal of their bonds 
in default; the stockholders; and the bankers and financiers who 
advance ready money and subscribe to necessary guarantees. Of 
these the creditors and the stockholders are widely scattered, and are 

1 Adapted by permission from Stuart Daggett, Railroad Reorganization, 
pp. 335-86. (Harvard Economic Studies, Vol. IV, 1908.) 



466 BUSINESS ADMINISTRATION 

quite unable to protect themselves by individual action. Their first 
impulse is, therefore, either to elect committees to represent them, 
or to authorize self-appointed committees of well-known men to 
look after their interests. Stockholders in a reorganization have 
little voice. They are the owners, and all that the corporation has 
is subject first to the bondholders from whom it has borrowed money. 

The creditors, then, are the most important factors, and they, 
like the stockholders, act through committees. There may be a 
committee for every class of bonds, or one or more classes may join 
together. The more general a committee, the greater the influence 
which it seems able to exert on reorganization, and the greater the 
likelihood that the plan which it approves may be accepted. The 
fact that a scheme has to meet the criticism of opposing interests 
during its formation renders it less likely to contain any injustice 
which conditions make it possible to avoid; and the endorsement of 
their representatives makes all classes of bondholders more ready to 
accord it temperate consideration. 

The situation which bankers and financiers occupy in relation to 
a bankrupt road is almost equally important. Their aid is essential 
to a reorganization while that of the officers and receivers of the 
company is not. And they are not subject to the pressure of imminent 
financial loss which forces creditors and stockholders to accept plans 
of which they do not altogether approve. It is true that these bankers 
may have money invested in the securities of the road. It may even 
happen that they have been formerly in control. In this case a 
certain pressure does exist. But as bankers their function is to do 
one or both of two things; namely, to advance cash to keep the rail- 
road system together pending reorganization, and to underwrite 
assessments or the sale of securities. Either one of these involves 
them in new risks, and in undertaking either they will be only indi- 
rectly affected by investments which they may previously have made. 
Their influence on reorganization is strong because they are necessary, 
and because they are free to participate or not to participate accord- 
ing to their opinion of the precise reorganization plan proposed. For 
much the same reason their influence is a wholesome one. The 
primary conflict which takes place in any reorganization is between 
the interests of the corporation which needs a lessening of its burdens, 
and the interests of the securityholders which is opposed to any 
reduction in their claims. The degree to which the former interest 
prevails determines the strength of the reorganized company. In 



THE ADMINISTRATION OF FINANCE 467 

this conflict the bankers naturally take the side of the company. As 
bankers, who advance cash, and who usually receive their pay in 
securities, they wish to make the corporation prosperous, and to 
raise the quotations of its securities to a high figure. An important 
factor also is that as reputable banking firms they wish the future 
career of corporations which they have handled to reflect credit 
upon themselves. 

At the beginning of the ordinary reorganization, then, creditors, 
stockholders, syndicate, and corporation find themselves face to 
face. The interests of the syndicate and of the corporation most 
nearly coincide except in so far as the syndicate is an owner of stocks 
or bonds. The syndicate desires a radical reorganization, — the 
corporation requires it. But as between stock and bondholders and 
the corporation; between the stockholders and bondholders; or 
between the junior and the senior bondholders; there is well-nigh 
complete antagonism. The corporation, to repeat, needs a reduction 
in the fixed charges which it has to pay. The securityholders wish 
to lose as little as possible. The stockholders hope to force sacrifices 
from the bondholders, and the bondholders to levy a heavy assess- 
ment upon the stock. The junior bondholders call upon their seniors 
to bear their part; and the seniors reply that they are well secured and 
that the juniors and the stock must take care of themselves. 

The first question which arises is that of the cash requirements. 
How much cash^Tiust be raised to pay off the floating debt, and how 
much working cash capital will the new corporation require? It is 
almost always true that a large floating debt has accumulated prior 
to reorganization. 

In general there are two ways by which cash for floating debt 
and working capital can be raised: (1) By assessment on security- 
holders. (2) By the sale of securities. 

Sales of securities may comprise the sale of securities of the 
bankrupt, or of other corporations held in that company's treasury, 
or they may be sales of part of new bond or stock issues reserved 
for that purpose. 

The case of an assessment is very different. Securities may be 
sold to outsiders or to present securityholders. In the one event no 
pressure at all can be brought to bear; in the other only that of the 
indirect loss which the difficulties of the reorganizing company 
would involve. An assessment, on the other hand, is levied solely 
on securityholders and is compulsory. Stockholders or bondholders 



468 BUSINESS ADMINISTRATION 

who refuse to pay are ordinarily debarred from all participation in 
the reorganization, and lose all chance to recoup their losses from 
their share in subsequent prosperity. In return for the assessment 
some security is usually given, so that from one point of view an 
assessment and a sale resemble each other. 

The results of the discussion may be briefly summed up as 
follows: 

First. Reorganization is most frequently an attempt to extricate 
an embarrassed company from its difficulties. 

Second. These difficulties can generally be traced either to an 
unrestricted freedom of capitalization, or to destructive competition. 

Third. The shape in which trouble appears is likely to be that 
of a large floating debt or of excessive fixed charges; either or both 
of which may have brought the corporation to a critical condition 
sometime before the actual collapse. 

Fourth. The best practice favors the retirement of floating 
debt by assessments on securityholders, though sales of securities 
are sometimes resorted to, or a combination of sales and assess- 
ments is employed. 

Fifth. Fixed charges are composed chiefly of interest and 
rentals. Interest payments are reduced by the retirement of out- 
standing bonds, by new bonds which bear a lower rate of interest, or 
by income bonds or stock, or by a combination of securities with a 
fixed rate of interest with securities upon which payment of interest 
is optional. Rentals may be reduced by direct negotiation, or the 
leased roads may be absorbed into the main system, and their security- 
holders receive new stocks and bonds as above. 

Sixth. The new bonds are of fewer kinds and have longer terms 
to run than the bonds which they displace. 

Seventh. This reduction in fixed charges imposes a loss on the 
greater part of securityholders, both in respect to the annual interest 
which they can claim, and in respect to the selling price of their 
holdings. A similar loss is suffered by those securityholders who pay 
the required assessment. 

Eighth. The loss falls on securityholders according to the 
seniority of their holdings — those bonds escaping which can expect 
to satisfy their claims from the selling price of the railroad at fore- 
closure sale. 

Ninth. The most important development in reorganization 
practice has been the increasing use of new securities bearing a fixed 



THE ADMINISTRATION OF FINANCE 469 

rate of interest with new securities bearing a conditional rate of 
interest; a use which may make the losses of junior securityholders 
temporary instead of permanent, and yet safeguard the interests of 
the corporation. In this connection preferred stock has gained in 
popularity over income bonds. 

Tenth. This development, and the issue of new securities for 
floating debt and for other purposes, have caused the capitalization 
after reorganization in all but one of the cases which we have exam- 
ined to exceed the capitalization before. 

Eleventh. In order to perfect a reorganization additional pro- 
visions are often inserted, which protect junior securityholders against 
the reckless issue of new bonds, supply the corporation with ability 
to make necessary betterments from capital account, protect the 
corporation from sudden changes in control, and similarly supple- 
ment the main clauses. 



See also p. 450. Recitals in Bonds. 

p. 854. Chapter x. Analysis of a Business Case. 

[A reorganization in anticipation of a prospering 
enlarged business.] 

D. Financial Policies and Frequently Used Devices 

The preceding section dealt with the financial policies and tech- 
nical devices which the manager calls into use rather infrequently 
when he is bringing about some relatively permanent change in the 
capital used in the business. We turn now to day-to-day operations, 
devices, and policies. 

Any compehensive treatment of day-to-day financial operations 
would take us far beyond the scope of this present course. We must, 
therefore, again use a sampling method. We begin (Selections 23-26) 
by getting some idea of the technical devices in this field which are of 
service to the financial manager. Here we take as our samples two 
important accounting records — the balance sheet and the profit-and- 
loss statement — and the more usual commercial credit instruments, 
such as the promissory note, the trade acceptance, and the bill of 
exchange. The use of these commercial credit instruments will be 
so readily understood that little need be said concerning them. The 
accounting records call for a word of comment. 

We have not at this time the slightest interest either in "good 
accounting form" or in correct accounting terminology. We wish to 



47© BUSINESS ADMINISTRATION 

understand the balance sheet and the profit-and-loss statement not as 
ends in themselves but as means to ends. If we can reach an under- 
standing of these financial statements or reports, (a) we can see how 
they are of service to the financial manager in presenting data which 
will aid him in arriving at business judgments, and (b) we can get 
a clearer view of the consequences of financial acts or policies, because 
the consequences are always reflected in these financial statements. 
An ability to read understandingly a balance sheet contributes not 
a little to one's ability to understand financial policies and the conse- 
quences of financial acts. 

Turning from technical devices, .we take up (Selections 27-29) the 
story of short- time advances to a business, giving particular attention 
to the attitude of bankers and trade creditors. 

We then try to understand (Selections 30-32) what becomes of 
the gross earnings of a business. In large part this matter explains 
itself, but there are some points which require discussion. Below 
there is given an ordinary form of the income statement of a corpora- 
tion. .By glancing down through it one can readily sense the issues 
that arise, one after another, in the disposition of gross earnings. 
Those items which come up for discussion in Selections 30-32 are put 
in italics. 

a) Gross earnings from operation or manufacture 

b) Deduct operating or manufacturing expenses, including repairs, 
renewals, and depreciation and the result is the 

c) Net earnings from operation or manufacture 

d) Add income from other sources and the result is the 

e) Total income 

f) Deduct taxes and we have the 

g) Balance applicable to fixed charges 
h) Deduct interest 

i) Deduct rentals 

j) Deduct sinking fund and other charges, such as special reserves, 
and we have the 

k) Balance applicable to dividends and surplus 

l) Deduct dividends and we have the 

m) Surplus from the year's operations 

The section closes with an interesting bit of case material (Selec- 
tion 33), showing how one important firm handled its finances during 
a period of depression. It is particularly interesting in that it shows 
so clearly the interdependence of business relationships. There is no 



THE ADMINISTRATION OF FINANCE 



471 



such thing as financial policy separate and distinct from marketing 
policy, production policy, or personnel policy, to cite only a few of the 
more important relationships. 

PROBLEMS 

1. A new corporation has just been formed. The stockholders pay cash at 
face value for 1,000 shares of stock at $100 per share. Give the balance 
sheet. 

2. The corporation, through its officers, buys land for $8,000, erects a 
factory at a cost of $15,000, puts in equipment at a cost of $20,000. 
Give the balance sheet. Would many accounts be summarized to get 
the figures for this balance sheet ? 

3. A corporation, in seeking trade credit, gave the following statement 
to the firm from which it sought the credit. 



Assets 
What the Business Has 



Cash 

Bills Receivable (Net) .... 
Accounts Receivable (Net) 

Merchandise 

Land 

Buildings 

Machinery- Fixtures 



Total 



5 

3 

94 

63 

10 

32 

7i 



281 



421 
619 
248 

934 
000 
400 
926 



548 



03 



Liabilities 
What the Business "Owes 1 

Notes Payable 

Accounts Payable 

Bonded Debt 

Mortgages 

Accrued Liabilities 

Total 

Capital Stock Outstanding. . 

Surplus-Profits 

Reserves 

Total 



55 


000 


11 


216 


i.S 


000 


8 


9 2 5 


90 


141 


150 


000 


28 


901 


12 


505 


281 


548 



41 



27 

68 



14 
99 



a) Is this a balance sheet or a profit and loss statement ? 

b) Set up any division you please in surplus and undivided profits. 
What, to your thinking, is the difference between the two ? 

c) Try to have this company declare and pay a 10 per cent cash dividend . 

d) Instead, declare a 10 per cent scrip dividend. How will the state- 
ment stand ? Do not trouble yourself about accounting terminology 
in answering this. Have the account tell the truth in your own 
language. 

e) Carry $5,000 undivided profits to surplus and $1,000 to reserve 
against storms. 

f) A fire destroys $1,500 worth of uninsured merchandise. Show effect 
upon the statement. 

g) Sell $10,000 merchandise getting $6,000 in cash. How do you 
account for the other $4,000 ? 

h) If this concern needs funds, why does it not "use some of the sur- 
plus," say, by selling part of it ? 



472 BUSINESS ADMINISTRATION 

i) The concern suddenly decides it has "good-will" to the amount of 
$15,000. Have this appear in the statement. Do not trouble 
yourself whether this is good accounting practice. 

j) Can one judge the success or lack of success of a business house by 
the cash bank balance it shows at the end of the fiscal year ? 

k) What is meant by saying that financial policies are reflected in the 
accounts ? 

4. What are some of the subclasses of current assets ? Why and when is 
it expedient to have several classes shown on the balance sheet ? 

5. What are some of the subclasses of liabilities? Why and when is it 
expedient to have several classes shown on the balance sheet ? 

6. What parties are interested in the balance sheet of corporations? 
Why are they interested? 

7. "It may be said that a balance sheet is a cross-section of a business 
showing how it stands at a particular moment of time." What does 
the profit and loss statement show ? The budget ? 

8. "It is well for the reader to bear in mind at this point that a balance 
sheet is only an expression of opinion regarding the financial condition 
of a business at a given time." Explain. 

9. Study Selection 24 B, making certain you know the meaning of the 
terms used and how loss and gain is arrived at. 

10. What is meant by book credits? checks? promissory notes? drafts? 

bills of exchange? acceptances? 
n. "The open accounts receivable of a manufacturer or wholesaler are 

looked upon as a much better and more liquid asset than the accounts 

receivable of a retailer." Why ? 

12. "The objects and advantages of requiring promissory notes from 
purchasers are numerous. First, the note is the best evidence of the 
debt. Second, the note definitely settles the amount due from the 
buyer to the seller. Third, the note is an effective aid in compelling 
prompt payment of the account. Fourth, a promissory note is more 
readily transferable and salable than a book account. Nevertheless, 
the use of book-account credit is far more extensive than the use 
of promissory notes." Why is book-account credit more extensively 
used? 

13. "It is not always good business policy for a company to take as much 
trade credit as it can get." Why not ? 

14. "The reader must avoid any impression that one merchant may look to 
the one who handles the goods earlier in the chain for all the capital or 
credit needed in the conduct of his business." Is this true ? 

15. "Who, then, suffers by the retailer's improvident credit granting? 
First, of course, the retailer himself. Second, the honest consumer. 
Third, the manufacturer, jobber, and other distributors." Explain. 



THE ADMINISTRATION OF FINANCE 473 

16. If you were making a short- time loan to a retail merchant what items 
on the balance sheet would be of particular interest to you ? 

17. Compare the value of mercantile agencies, local credit men's associations, 
and the financial statements of the firm itself as to the reliability of their 
information as a basis for (1) extending credit; (2) investing in the 
business. 

18. Study the reading "What a Bank Wishes to Know before Making a 
Loan" to see whether you understand why it is worth while to call 
for each item. 

19. Some banks wish an industrial engineer to study a factory before 
making a loan. Why ? 

20. "Enough has been said to indicate the true purpose and safe extent 
of short-term borrowing, whether from trade credit, bank loans, or the 
sale of short-term obligations to the public, (a) To produce, ship, 
store, sell and collect for the regular product of the business, when 
there is reasonable certainty of turning the transaction in time to 
repay the loan, (b) For current or capital expenditures pending the 
receipt of funds from the sale of stock or bonds which have been under- 
written, and the proceeds of which are expected in time to liquidate the 
temporary loan, (c) To carry unusual seasonal stocks, production, 
or accounts receivable which will ordinarily be liquidated in time 
to repay the loan or amply secure its partial renewal, (d) To pay 
dividends which have been earned but are temporarily locked up in 
assets that will be normally liquidated in time to repay the loan." 
Cite instances of each case. 

21. How may a merchant borrow on his accounts receivable ? Is it expedi- 
ent to do so? 

22. "Actual surplus is usually created out of net earnings from operation. 
Fictitious surplus may be created by a stroke of the accountant's 
pen, simply by writing up the value of assets or charging maintenance 
items to inventory accounts." Illustrate. 

23. What is a surplus? From what sources may it be obtained? For 
what purposes is it usually accumulated ? 

24. "Book surplus is distributed by (a) cash dividends; (b) scrip dividends; 
(c) stock dividends; (d) the creation of special reserves; (e) charging 
off a certain amount to make good, losses which have impaired capital, 
or to squeeze the water out of original over-capitalization." Be sure 
you know the meaning and method of each way. 

25. "Whether or not all or part of the surplus should be distributed in the 
form of dividends will require careful consideration of many factors. 
Summarized they are as follows: 

a) Can the business safely reduce its liquid assets by the amount neces- 
sary to pay the dividends ? 



474 BUSINESS ADMINISTRATION 

b) Is the margin between selling price and cost decreasing to such an 
extent as to threaten the profits enjoyed in the past ? 

c) Have all expenditures for capital accounts been justified and have 
they been bona fide expenditures ? 

d) What is the company's credit position and its ability to raise needed 
sums for expansion through the issue of capital stock or bonds ? 

e) Is the investment market favorable ? 

f) Can the profits safely stand increased fixed charges or increased 
amounts for dividend distribution ? " 

Explain each item. 

26. Explain what is meant by (a) depreciation, (b) replacement, (c) better- 
ment, (d) extension. What confusion is likely to result in charging 
these items to their respective accounts ? 

27. "In a general sense depreciation means a decrease in value; apprecia- 
tion on increases. Decrease in value may be caused by: 

a) Deterioration in physical condition, due to use or corrosion. 

b) Obsolescence. 

c) Changing business conditions, due to either new legislation or 
fluctuating market demands. 

d) Unavoidable accident, or destruction by act of Providence." 
Should these be charged to capital account or to current expenses ? 

28. The XYZ company contemplates for the coming year the following 
expenditures: (a) a slate roof to replace an iron roof on one of its main 
buildings; (b) an extension of its fabricating plant to house several 
new machines; (c) erection of a building to serve as a recreation room 
and lunch counter for employees; (d) to replace a wooden warehouse, 
which cost originally $40,000, with a re-inforced concrete building, 
expected to cost $70,000; (e) to buy a trade-mark for $100,000. The 
finance committee proposes to finance these purchases by an issue of 
twenty-year bonds. The slate roof is expected to cost $2,500, against 
$1,000 for the iron roof. Extension $50,000, and the employees' 
building $35,000. Discuss the wisdom of this proposal. 

29. What would happen if a corporation paid dividends annually without 
making allowance for depreciation, replacement, and repairs ? Would 
the original price of the stock return to the stockholders? Would 
there necessarily be a loss to them ? 

30. What is a stock dividend ? A scrip dividend ? What are the advan- 
tages of such forms of dividend payment ? Are they advantages to the 
stockholder ? 

31. "Scrip dividends really partake of the nature of a forced loan." Why 
or why not ? 

32. Discuss the policy of paying dividends where (a) losses in fixed capital 
have occurred; (b) where losses in circulating capital have been sus- 
tained. 



THE ADMINISTRATION OF FINANCE 475 

33. "It is often assumed that adequate and regular profits, provided they 
are correctly estimated, justify dividends. This assumption, however, 
is the direct source of a large proportion of financial embarrassments." 
Why? 

34. What are the advantages of a stable dividend policy? By what 
methods may a stable dividend rate be maintained in spite of fluctuat- 
ing earnings? 

35. What are the chief characteristics of a sound dividend policy? 

36. Under what conditions or circumstances are the directors of a corpora- 
tion justified in borrowing the money with which to pay dividends ? 

37. What is meant by saying that a concern may be economically sound 
but in financial straits ? 

38. A concern decided that it needed to invest an additional $15,000 in 
machinery. Cite possible ways of getting the funds. Show effects of 
each way upon the balance sheet. 

39. Could a small concern have used the methods sketched in Selection ^^ ? 

23. WHAT THE BALANCE SHEET SHOWS ABOUT 
FINANCIAL MATTERS 1 

[This selection is written from the point of view of an auditor. 
His statements concerning what "should" be done or what is "right" 
may, however, be regarded not as discussions of good accounting 
practice, but of sound financial policy.] 

The credit man of today, whether he be commercial banker, 
investment banker, manufacturer, or merchant, in seeking informa- 
tion as to the financial standing of a concern has many avenues from 
which he can obtain data. The mercantile agencies with their 
investigations and reports; the credit clearing houses; the local 
credit men's associations; the opinion of those with whom the con- 
cern has done business in the past; all of these are available. These 
sources are, however, indirect and are all based largely upon hearsay 
and opinion. They may be satisfactory enough in indicating the 
general reputation of a concern; but to determine its present financial 
standing they are not only inadequate but are dangerous and obsolete 
as compared with the concern's own financial statement — provided, 
of course, that this statement is true, properly prepared and verified. 

These financial statements are technically known as the balance 
sheet and the profit and loss statement. A balance sheet is a state- 
ment showing on one side all of the assets of a concern as of a certain 

1 Adapted from Paul Havener, Analysis of Financial Statements. (Privately 
printed.) 



476 BUSINESS ADMINISTRATION 

date and on the other side all of the liabilities. Custom in this 
country places the assets on the left-hand side and the liabilities on 
the right-hand side. The difference between the assets and the 
liabilities, if the assets exceed the liabilities, is the net worth. In 
the case of corporations, this net worth will consist of capital stock, 
surplus, and undivided profits. In partnerships, the net worth will be 
the capital accounts of the partners, together with any undivided 
profits. If the liabilities exceed the assets, there is no net worth 
or capital belonging to the owners left, and the difference represents 
the amount that the concern is insolvent. The left-hand side of 
the balance sheet shows what property the business has and the 
right-hand side shows to whom this property belongs. The profit 
and loss statement is an analysis of the operations of the business for a 
certain period of time, showing the total income and the expenses 
and losses during the period. It may be said that a balance sheet is 
a cross-section of a business, showing how it stands at a particular 
moment of time. The profit and loss statement shows how it arrived 
at this position from a previous one. 

The assets of a business are of two distinct types — fixed assets 
and current assets. Both of these can be further divided, but to 
keep these two kinds of assets always separate is one of the most 
important things in reading a balance sheet. Fixed assets, also 
known as permanent assets, invested assets, etc., are those which 
represent capital sunk into the business that cannot be converted 
into cash except upon the liquidation of the business. They are 
usually such assets as land, buildings, machinery, equipment, furni- 
ture and fixtures, patent rights, good-will, etc. These assets are 
not in the regular course of business convertible into cash, and there- 
fore cannot be used to pay the current liabilities of the business. 
Current assets, also known as liquid assets, floating assets, quick 
assets, working assets, represent cash and such other assets as in the 
regular course of business will be cash: such as accounts receivable, 
notes receivable, merchandise on hand, etc. All past due or doubt- 
ful current assets should be called slow assets. The purpose of most 
businesses is to convert current assets into cash as soon as possible. 

The liabilities of a business are also of two types, but the dis- 
tinction is not so great as in the case of the assets. The fixed liabilities 
are obligations which do not mature for several years. They are 
usually secured by mortgage on the fixed assets, such as mortgage 
notes, bonds, purchase money obligations, etc. Current liabilities, 



THE ADMINISTRATION OF FINANCE 477 

sometimes called quick liabilities, floating debts, etc., are liabilities 
which will have to be paid in cash within a short period of time, such 
as accounts payable, notes payable, pay-rolls, etc. 

We have before us the balance sheet of A, B and Company, which 
is as follows: 

BALANCE SHEET— A, B & CO. 
As of June 30, 1916 

Assets 
Fixed: 

Land and buildings, etc $ 50,000 . 00 

Machinery and equipment 75,ooo . 00 

Horses, wagons, etc 5,000 . 00 



$130,000.00 
Slow: 

Accounts past due $ 10,000 .00 

Due from officials 20,000 . 00 



$ 30,000.00 
Current: 

Cash on hand $ 21,000.00 

Notes receivable 2,000 .00 

Accounts receivable 175,000 .00 

Inventories 75 ,000 . 00 

$273,000.00 
Deferred: 

Prepaid insurance and licenses $ 600 . 00 



total assets $433,600.00 

Liabilities 
Current: 

Accounts payable $ 40,000 . 00 

Notes payable 60,000 . 00 



TOTAL LIABILITIES $100,000 . OO 



NET WORTH $333,600 . CO 

Consisting of: 

Capital stock $200,000.00 

Surplus 83,660 .00 

Profit per year 50,000 . 00 

$333 3 6oo. 00 



478 BUSINESS ADMINISTRATION 

The difference between the total assets and the total liabilities of 
any business, as previously mentioned, is the net worth. An analysis 
of the different classes of assets and liabilities will show clearly where 
this net worth is invested. 

With the balance sheet as a whole visualized before us, let us 
dissect each item therein. 

Fixed assets. — The first item of the fixed assets consists of land and 
buildings. On this particular item we ask the following questions: 
Are there any liens or mortgages against the real estate and buildings ? 
Is the land at cost ? Is the building at cost less a reasonable allow- 
ance for depreciation ? Does the concern own the land and buildings ? 
Frequently a concern will have mortgages or purchase money obliga- 
tions on this item and only show same on the balance sheet at a net 
value, that is, the value of same after deducting the liens thereon. 
This is wrong. These liens or mortgages may fall due within a short 
period of time, seriously upsetting the relation existing between the 
current assets and current liabilities. Again, there is the question 
of the basis of value. Occasionally concerns, during a bad year's 
business, revalue their real estate by charging same with arbitrary 
amounts and crediting profit and loss. Real estate, which is a general 
term including both land and buildings, should be valued at the 
original cost in the case of land, and cost less reasonable allowance for 
depreciation in the case of buildings. Any liens or mortgages thereon 
should appear among the liabilities of the company. 

The second item in the consideration of fixed assets is usually 
machinery and equipment. The important thing governing their 
valuation is depreciation. Depreciation is a general term and covers 
the gradual diminishing in value of an asset whether by wear and 
tear or by obsolescence. Many failures of concerns with long- 
established records, who have paid large dividends and big salaries to 
their stockholders and employees, may be traced to the failure to 
provide properly for depreciation on their machinery and equipment. 
The machinery in a factory can become obsolete over night in this 
age of modern invention. 

All items such as furniture and fixtures, automobiles, wagons, 
horses and mules should be revalued each year. The rate of 
depreciation on thern varies so much, depending entirely on the use 
to which they are put, that no fixed rate of depreciation is satisfactory. 

Hence, in summarizing, it may be said that tangible fixed assets 
should appear on the books of the company at cost less full deprecia- 



THE ADMINISTRATION OF FINANCE 479 

tion. . In the case of liens or mortgages thereon, these should be shown 
among the liabilities and not deducted from the assets. Intangible 
assets, such as good-will, patent rights, trade-marks, copyrights, 
franchises and concessions, are not always to be condemned, as in 
many instances they are assets easily converted into cash. They 
should always, however, appear on the balance sheet under a separate 
heading and should not be included with the tangible fixed assets 
as they now are by many of our largest corporations, desiring to cover 
up so-called water in the capital stock issued. 

Current assets. — The first item of the current assets is usually 
cash. In more cases than you might suspect, this item is misleading. 
Banks sometimes ask concerns that are in the habit of overdrawing 
their accounts to deposit money with them, giving a certificate of 
deposit therefor. The concern then takes these certificates to other 
banks and borrows on them to the full amount of the certificates. 
Cash on hand should consist of money in the cash drawer and of 
funds in bank subject to check: money in cash drawer should, of 
course, be comparatively small, except in case of concerns located in 
places where there are no banks; from the funds in bank should be 
deducted all unpaid outstanding checks. Pledged certificates of 
deposit, miscellaneous paid bills, due bills from officials or employees 
are not cash items and should never be so called. 

In this balance sheet notes receivable appear too small in relation 
to the other assets and should lead to inquiry as to whether or not the 
concern has rediscounted any of its notes. It is customary for a 
concern to rediscount its customers' paper and, if same is not paid at 
maturity, the concern rediscounting has to take it up, so this redis- 
counted paper is a contingent liability which is liable to become a 
real one at an} r moment. The financial statement of a concern should 
show somewhere the possible liability covering all paper rediscounted. 
The remaining notes on hand should be due from customers of the 
company. Notes from officers, employees, and stockholders should 
be shown under a separate heading in the balance sheet. Past due 
notes and doubtful notes should be put under a separate heading 
called "slow assets." 

The thing to ask in connection with accounts receivable is how 
these accounts were created, whether entirely by legitimate trans- 
actions of the company or partly by items due from officers, employees, 
stockholders, or merchandise sent on consignment. If the latter 
be the case, these items should be eliminated and appear elsewhere in 



480 BUSINESS ADMINISTRATION 

the balance sheet. Another important matter is to ascertain whether 
any accounts have been sold to discount companies or assigned for any 
reason whatsoever. When accounts are sold to discount companies, 
the credit risk has not been eliminated; the business transaction is 
not closed, nor has the money been received from the customer. 

Inventories. — The important thing to consider in inquiring into 
the inventories of a company is the quantities, quality, and price 
at which the inventory was taken, and whether or not there are any 
liens on any of the inventories or consigned goods included therein. 
This is probably the easiest part of the balance sheet to state incor- 
rectly, and the only way that you can be sure the inventory appears 
at the right valuation is to know that it has been thoroughly tested 
as to quantities, quality, prices, footings, and extensions by disinter- 
ested outsiders. 

Deferred assets. — Deferred assets consist principally of prepaid 
insurance and licenses. It is usually a small item except in cases of 
agricultural corporations, who close their books in the middle of a 
crop season. In many cases, inventories of supplies and materials 
should be put under this heading. It simply represents expenses 
prepaid, of which the following operating period will derive the benefit. 
In comparison with the other assets of the business, they should be 
relatively small. 

Current liabilities. — In regard to the liabilities of the business, the 
first item is usually accounts payable. This is an item which is 
readily manipulated and liable at all times to be understated. In 
auditing the affairs of a concern it is one of the most difficult items to 
verify. 

Notes payable, like accounts payable, can be easily understated. 
In the balance sheet or auditor's report it is best that notes payable to 
banks, to note brokers, and to other creditors be shown separately. 
An important matter in examining this item is to ascertain whether 
or not any money has been borrowed by the proprietors or officials in 
the concern's name and turned over to the business with a credit to the 
capital account of the proprietor, instead of appearing as a liability of 
the business. 

Liabilities for pay-rolls and taxes, it should be remembered, are 
first lien on the assets, and in case these items are out of proportion, 
remember that they will be paid before anything else, perhaps leaving 
little for the unsecured, common creditors. 



THE ADMINISTRATION OF FINANCE 481 

Amounts due employees, officers, and relatives may in some cases 
be properly shown under a heading separate from current liabilities. 
Nevertheless, it should be distinctly kept before you that, in case of 
financial difficulties, such accounts usually get paid before any others. 

Contingent liabilities and reserves. — Full information should 
appear somewhere on the financial statement as to all possible 
contingent liabilities. We have already spoken of notes receivable, 
rediscounted, and accounts receivable sold. Accommodation endorse- 
ments have not infrequently been the cause of the failure of a pros- 
perous business. Full inquiry should be made as to whether there are 
any such endorsements outstanding, as they may appear at any time 
and demand payment in full. Inquiry should also be made as to 
whether there are any suits pending in the courts, or judgments which 
might make a material difference in the financial position of the con- 
cern. With the employees' liability law and other similar measures, 
it is possible for liabilities of this nature to arise at any time. Out- 
standing contracts, leases, moneys borrowed from members of family 
should be looked into as to whether or not they have claims on the 
business. Special attention should be paid to reserve accounts. 
Reserve for depreciation should be deducted from the asset which it 
affects; reserves for taxes, for pay-rolls, and for interest are not 
reserves, but accrued liabilities, and should show among the current 
liabilities. Reserve for bad debts, when appearing at a lump sum of 
say $5,000.00 or $10,000.00, should be closely investigated. Reserves 
for bad debts should not appear on the liability side of the balance 
sheet, but be deducted directly from the accounts affected. In some 
instances, an arbitrary amount set aside like this is not enough to 
cover the accounts which the proprietors know are worthless. It is 
only by a detailed inspection of each account individually that the 
amount necessary can be determined within any degree of accuracy. 
A reserve for contingencies is usually a part of the capital of the busi- 
ness, consisting of profits temporarily withheld. 

Fixed liabilities. — Fixed liabilities, such as long-time bonds, 
should appear on the balance sheet under a separate heading among 
the liabilities and not erroneously deducted from the value of the 
assets against which they are liens. In the case of serial bonds, 
a certain amount of which fall due each year, the amounts falling due 
within a year of the date of the balance sheet should be shown as 
current liabilities and not as fixed ones. Due caution should be 



482 BUSINESS ADMINISTRATION 

exercised in ascertaining upon just what assets the fixed liabilities, 
that is, the mortgages and bond issues, are liens. Occasionally they 
are first lien, not only upon the real estate of the company, but upon 
all other assets, and this should plainly appear on the statement. 

Capital, or net worth. — The important thing in analyzing net worth 
is first to see how the capital is invested and how it originated. Often 
the surplus of a concern is not real surplus, but a manipulation of the 
values of the fixed assets. 

24. WHAT THE PROFIT AND LOSS STATEMENT SHOWS 

A 1 

The examination of the profit and loss statement is principally a 
matter of comparison, the object, of course, being to see whether the 
business is going forward or backward. 

Let us now inspect the profit and loss statement of A, B and 
Company, just as we did their balance sheet. 

On page 483 appears the analysis of profit and loss of A, B & 
Company. 

The profit and loss statement is usually divided into sales, less 
cost of sales, which gives the gross profit, less expenses, which leaves 
the operating profit, then special deductions and losses are taken 
off and special additions are added thereon, giving the net income for 
the year. 

Sales. — Comparison should be made with previous periods as to 
the volume of sales, and, in well-conducted businesses, this should 
usually show an increase. Inquiry should be made as to whether 
or not there is included under the heading of sales goods sent out 
on consignment or goods shipped to subsidiary companies, branches, or 
agencies. Such items are not sales but part of the inventory until 
sold. The total sales should be compared with the inventory in 
order to determine the number of times same has been turned over 
during the period. 

Sales should also be compared with accounts receivable, as this 
will show how fast accounts are being liquidated, and also, in many 
instances, bring to light whether any accounts are included in accounts 
receivable not originating in sale of merchandise. From the total 
sales should be deducted full allowance for returnable packages, 
freights, discounts, etc. 

1 Adapted from Paul Havener, Analysis of Financial Statements. (Privately 
printed.) 



THE ADMINISTRATION OF FINANCE 483 

Cost of goods sold. — The most approved manner of arriving at the 
cost of goods sold, whether for mercantile or manufacturing con- 
cerns, is as follows: To the inventory of the goods on hand at the 
beginning of the year should be added the purchases of goods made 
during the year, or raw material plus cost of manufacture in case 
of manufacturing plants, plus any other direct charges, such as 
incoming freight, incoming drayage, etc. This gives the total goods 
to be accounted for. The inventory of goods on hand at the end 
of the year represents all goods which have not been sold, and is 
therefore deducted from the "total goods to be accounted for," 

ANALYSIS OF PROFIT & LOSS— A, B & CO. 

For Twelve Months Ending June 30, 191 6 

Sales $500,000 . 00 

Goods on hand first of year $ 60,000 . 00 

Goods purchased during year 415,000.00 

Total to be accounted for $475,000 .00 

Inventory at close of year 75,000.00 

Balance cost of goods sold $400,000 . 00 

Gross profit $100,000 . 00 

Expenses: 

Rent $ 10,000 . 06 

Salaries 20,000 . 00 

Taxes 2,000 . 00 

Interest 4,000 . 00 

Miscellaneous 11,000.00 

Total expenses $ 47,000 . 00 

Operating profit for year $ 53,000 . 00 

Less: 

SPECIAL DEDUCTIONS & LOSSES: 

Bad debts ; $ 5,000 . 00 

Fire loss 8,000 . 00 

$ 13,000.00 
Plus: 

SPECIAL additions: 

Profit on sale of real estate $ 10,000 . 00 $ 3 ,000 . 00 

Net income for year $ 50,000 . 00 

Percentages: 

Gross profit 25 % on cost 20 % on sales 

Expenses n. 75% on cost 9 . 4% on sales 

Operating profit 13 . 25% on cost 10.6% on sales 

Net profit 12.5 % on cost 10 % on sales 



484 BUSINESS ADMINISTRATION 

leaving balance as cost of goods sold. This, when deducted from the 
total sales, gives the gross profit for the period. It is therefore 
obvious that the amount at which the inventories are valued deter- 
mines to a great extent the profit for the period. 

Expenses. — The expenses of the business should be carefully 
compared with the previous periods to see whether or not they have 
increased and whether or not the business is being managed economi- 
cally. The item of interest should be carefully looked into as com- 
pared with the notes and accounts payable, as a check on the total 
of same outstanding. When miscellaneous expenses are shown at too 
arge an amount, details should be required. Salaries of officials 
should be in proportion to the size of the business. When the total 
expenses are deducted from the gross profit, there then remains the 
operating profit for the year — from which, however, further deduc- 
tions must sometimes be made. 

Special deductions and losses: — All extraordinary losses, such as 
bad debts, fire losses, losses through damage suits, should be absorbed 
during the period in which they are discovered and not charged di- 
rectly to surplus. When these items are charged directly to surplus, 
the profit and loss statement does not show the movement of the 
business from one balance sheet to another as it should. The amount 
charged off on account of bad debts should receive due consideration 
as compared with the total sales. 

Special additions. — All extraordinary profits, such as profits 
realized from the sale of capital assets, should appear in the profit 
and loss statement under this heading, and same should be added to 
the operating profit for the year, leaving the net income. 

Somewhere in the profit and loss statement should appear a 
detailed statement of the percentages showing the gross profit based 
both on cost and on sales. Expenses, operating profit, and net profit 
should be treated in the same manner. On account of the confusion 
in the minds of many as to whether percentages should be figured on 
sales or cost, it is usually best to figure them both ways. 

The important thing in connection with the examination of the 
profit and loss statement is the comparison of same with previous 
periods and the comparison of same with balance sheet. 



See also p. 333. Measuring Aids May Result in Expense 
Standards. 
p. 335. Measuring Aids Reflected in the Profit-and- 
Loss Statement. 



THE ADMINISTRATION OF FINANCE 
B 1 



485 



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486 BUSINESS ADMINISTRATION 

25. FINANCIAL POLICIES REFLECTED IN ACCOUNTING 

RECORDS 1 

Accounting is a matter of policy as well as of principle. That is, 
judgment must be employed to determine under given circumstances, 
what principles apply and how they are to be applied. Like all good 
instruments, accounting principles may be purposely, or ignorantly, 
abused and misapplied. 

To be productive, wealth must be supervised; nor is it possible to 
remove altogether the element of risk inherent in all forms of enter- 
prise. There is a big human factor in business. For this very reason 
business is subject to manipulation which may be unfavorable as well 
as favorable in character. Like the modeling clay of the sculptor, 
wealth submits itself to an endless variety of formations. It is 
because of this that we speak of the policy of one company as conserva- 
tive, of another as radical, of another as aggressive, of still another as 
progressive or unprogressive. What do we mean by these terms ? 

Too frequently we employ them without any very definite signifi- 
cance and without more than a superficial inspection, or possibly 
from mere hearsay. The financial policy of a corporation is unavoid- 
ably linked up with its accounting policy. Indeed, it is through its 
accounts that this policy takes definite form. Usually a policy 
resembles a chemical compound and can be studied best by being 
split up into its elements. Some of the elements entering into the 
formation of the financial policy of a corporation and which are 
reflected in its accounts are: 

1. The attitude toward dividend payments. 

2. The method of meeting current liabilities. 

3. The method of raising additional capital. 

4. The selection of customers and collection of accounts. 

5. Payments of employees. 

6. The funded indebtedness. 

1. Some corporations make it their policy to pay annual dividends 
of a given amount and vary from that policy only in times of extraordi- 
nary prosperity or extreme depression. Usually such corporations 
have their capital stock scattered among a large number of holders 
who depend upon it to afford them a permanent and unvarying 
income. On the other hand there are many concerns that have no 
crystallized dividend policy, but which act upon the requirements of 

Adapted by permission from E. A. Saliers, "Financial Statements Made 
Plain," in the Magazine of Wall Street, Vol. XX (1917). 



THE ADMINISTRATION OF FINANCE 487 

the occasion. Such companies are hardly for the steady-going 
investor. Instead of selling bonds or stock to secure additional 
capital, profits may be retained and invested. In this way the surplus 
account may be increased until it rivals and possibly surpasses, in 
size, the capital stock account. Truly, this is conservative policy, 
yet it is not the kind of policy best suited to the investor who desires 
to receive his profits as they accrue, rather than in the form of a large 
stock dividend years later. 

The power to pay or withhold a dividend, assuming the existence 
of profits, is in the hands of the board of directors. Whether or not to 
declare it is optional with them. Once declared, a dividend becomes 
the direct obligation of the company and must be paid. 

2. Current liabilities constitute a most vital responsibility. 
They demand the constant vigilance of the management. Sometimes 
financial embarrassment occurs from the inability to secure enough 
cash to meet current liabilities, even though the concern be far from 
insolvency. This situation is liable to arise when general stringency 
occurs in the money market, it then being difficult to obtain aid 
through the hypothecation of other assets. 

Sometimes current liabilities are converted into funded liabilities 
to avoid immediate trouble — a procedure which only too frequently 
paves the way for future trouble. As a palliative against an extraordi- 
nary situation this plan may be justifiable, but as a permanent policy 
it is to be condemned. By comparing balance sheets for a consider- 
able period of years the tendency of current liabilities to increase 
may be noted; and if it is considerable the explanation therefor 
should be sought. The only justification for a permanent increase in 
current liabilities is a corresponding growth in the volume of business 
transacted. Without this, the cause may be in over-buying or in the 
inability to meet obligations falling due. 

3. The ease with which a corporation can raise additional capital 
to finance its growing demands is a pretty good index of its general 
reliability. Strong companies can usually choose what means they 
wish to encourage the influx of other people's money, but weak ones 
are driven to extremes to find some suitable form of security. Some 
of our railroad companies have exhausted their ingenuity and our 
language in their search for picturesque names for what in plain 
English ought to be called second, third, and fourth mortgage bonds. 
In general, new capital ought to be obtained through the issue of 
sufficient stocks or bonds to secure the required amount of money 



488 BUSINESS ADMINISTRATION 

without further resort to temporary bank loans, which, under the 
circumstances, might be made with difficulty. 

4. Too much circumspection in the selection of customers is 
hardly possible, although the importance of this consideration varies 
greatly in different lines. Where sales of commodities or services 
are mostly for cash little attention need be given to possible losses 
from bad debts. Where many sales are made on credit the considera- 
tion becomes one of prime importance. An up-to-date concern 
uses all available facilities to determine credit risks. Employment 
of mercantile agencies, co-operation with other corporations, and a 
systematized office practice are among essential features that char- 
acterize the work of progressive corporations. The investor will 
do well to go beyond the statement of accounts receivable shown in 
the balance sheet and attempt to learn to what extent worthless or 
doubtful accounts have been included. If the balance sheet has 
been certified by a firm of competent public accountants their vise 
may be accepted as a guaranty against occult and disreputable 
practices. 

5. The investor should note the satisfactoriness of the wage system 
in use. If it is a good one it will be contrived to reward diligence 
and trustworthiness and to discourage laziness and inefficiency. In 
the long run no corporation can prosper with a labor force composed 
of dissatisfied, indifferent, or ignorant men. Managers are now 
thoroughly convinced that future leaders are best grown in a home 
soil under surroundings which encourage the display of initiative 
and force. 

6. With the aid of the principles that have been discussed, study 
the funded indebtedness from all standpoints — from that of the 
capacity of the corporation to bear fixed charges, from that of the 
mortgage liens that underlie the bonds, from that of future probable 
requirements for additional capital, from that of the relative size 
of bonded indebtedness compared with capital stock and surplus, 
and from the standpoint of legal and technical requirements. 



See also p. 828. Accounting as an Administrative Aid. 

26. TYPES OF COMMERCIAL CREDIT INSTRUMENTS 1 

A promissory note is an unconditional written promise by X (the 
maker) agreeing to pay, either on demand or at a definite future date, 

1 Taken by permission from H. G. Moulton, Principles of Banking, pp. 32-35. 
(The University of Chicago Press, 1916.) 



THE ADMINISTRATION OF FINANCE 489 

a sum of money to Y (the payee) or to Y's order or to bearer. It 
may or may not designate the place at which payment is to be made. 
Promissory notes may be issued by institutions and governments as 
well as by individuals. Bank notes, United States notes, certificates 
of deposit, etc., are forms of the promissory note. 

To indorse a note the payee writes his name across the back of the 
instrument. This act makes the payee, like the maker, responsible for 
the payment of the note. Notes may also be indorsed by third parties, 

A PROMISSORY NOTE 



Due 

No. .<£fh Chicago Illinois, //Ja^^^^ /<f 191&. 

Qjshsj&ksp <2 -^ a -^*^r — after date for value received the undersigned promise to pay to the order of 

*? The National City Bank of Chicago 

<-rL,^ST/'-7i^t^^c&uc-^. *a^ *f ^Ss/aj - DOLLARS 

at its Banking House m Chicago Illinois, with interest AFTER MATURITY at the rate of seven per cent per 
annum until paid and with costs of collection and a reasonable attorney fee if not paid at maturity. Presentment' 
and demand for payment, notice of non-payment, protest and notice of protest are each and all hereby waived by 
the makers, endorsers and guarantors jointly and severally. Any indebtedness owing' from said bank or legal 
holder hereof to the undersigned or to any endorser or guarantor mag be appropriated and applied by said bank 
or legal holder on this note at any time either before or after maturity of this note and without demand upon or 
notice to any one. 



BUSINESS ADDRESS: 






thereby adding to the number of those responsible for the payment 
of the note. Notes which show only one person responsible for the 
payment are called single-name paper. Those which have two or 
more signers are called double-name or three-name paper. 

A bill of exchange is an unconditional written order, signed by X 
(the person giving the order — the drawer), ordering Z (the drawee) to 
pay, either on demand or at a definite future date, a sum of money 
to Y (the payee) or to Y's order or to bearer. The drawee may indi- 
cate his willingness to honor it by signing his name to the word 
" accepted" written across the face of the bill. 

Bills of exchange are of two kinds — foreign, and domestic or inland. 
A foreign bill is legally defined as one the drawer and drawee of which 
live in different countries or different states, while a domestic bill is 
one both parties to which live within the same state. Business 
custom, however, warrants our using the term domestic bill for all bills 
when both parties live in the United States, regardless of state lines. 

There is likely to be some confusion as to when to use the term 
draft. Draft and bill of exchange are often used interchangeably. 



490 



BUSINESS ADMINISTRATION 



For instance, we speak of drafts on London and bills of exchange on 
London, and we say New York exchange and drafts on New York. 
In the business world, however, there is a growing custom of using 
the term draft when speaking of domestic transactions, while one 
frequently hears the term bill of exchange in connection with foreign 
transactions. 

TRADE ACCEPTANCE 




(city of drawer) (date) 
ON 



-101 



No. 



(date of maturity) 



.PAY TO THE ORDER OF 



OURSELVES. 



.(DOLLARS $. 



THE OBLIGATION OF THE ACCEPTOR HEREOF ARISES OUT OF 
THE PURCHASE OP GOODS PROM THE DRAWER. THE DRAWER 
MAY ACCEPT THIS BILL PAYABLE AT ANY BANK, BANKER OR 
TRUST COMPANY IN THE UNITED STATES WHICH HE MAY DESIG- 
NATE. 



TO. 



(name of drawee) 



(street address) 



(signature of drawer) 
BY 



(city of drawee) 



This form usually has stamped across it another form which indicates its acceptance thus: 

ACCEPTED 
DATE 



PAYABLE AT 



LOCATION OF BANK. 



(signature of acceptor) 
BY 



Bills of exchange may be classified according to whether or not the 
parties to the order are bankers. A banker's draft is an order drawn 
by one bank and payable by another. It is not necessary, however, 
that the party to whom it is payable be a bank. In the case of 
individual or trade bills of exchange the payee may be the drawer 
himself as well as a third party. The payee may also be a bank. The 
second party, the drawee, may likewise be a bank, in which case the 






THE ADMINISTRATION OF FINANCE 



491 



bill of exchange is in the form of the familiar check drawn by a person 
against his deposit account in a bank. 

Bills may be classified according to whether or not they arise out 
of actual commercial transactions. Hence we have bankers' or 
finance bills, trade or commercial bills, and accommodation bills. 

A FOREIGN BILL OF EXCHANGE 



J 

EXCHANGE FOR 



£*- 



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Bankers' bills are used merely as a means of making payments and 
transferring balances and are secured by the reputation of the bank 
that draws them. A commercial bill arises out of an actual sale of 
goods, and is secured, not only by the general responsibility of the 
drawer, but also by the goods which have been exchanged for the 
purpose of sale. Accommodation bills are bills which do not arise 
out of any business transaction already concluded, though there may 
be an intention to purchase goods with the funds procured. 



492 BUSINESS ADMINISTRATION 

In order to illustrate the use of these instruments, suppose that X 
has bought a bill of goods from Y. X may pay in one of several ways: 
(i) He may "pay cash," and this may be in bank notes, United States 
notes, gold certificates, etc. (2) He may give Y a check on his (X's) 
bank. (3) He may draw and deliver a bill of exchange on Z payable 
to Y or Y's order. In such a case Z is presumably a debtor to X. 
(4) He may give Y a promissory note. This will merely defer actual 

PERSONAL BANK CHECK 



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payment. (5) He may " accept " a bill of exchange which Y has drawn 
upon him. This also merely defers actual payment. (6) He may 
transfer to Y some check or promissory note or bill of exchange which 
some other person (say V) has drawn to X's order or to bearer. (7) He 
may buy from his banker a banker's draft drawn (on some other 
banker) in favor of Y. (8) He may buy from his banker a cashier's 
check. 

27. SHORT-TERM LOANS AND TRADE CREDIT 1 

The three forms in which corporations incur short-term or medium- 
term obligations, are, trade credit, bank loans and notes sold to the 
public. 

The funds raised from the trade creditors are secured simply by 
buying goods on credit. It is not customary in most lines of business 
to demand cash immediately on delivery of goods, except from con- 
cerns that are considered untrustworthy. Thirty days is usually 
allowed before merchandise bills become due and payable, and a 

1 Adapted by permission from W. H. Lough, Corporation Finance, pp. 133-46. 
(Alexander Hamilton Institute, 1916.) 



THE ADMINISTRATION OF FINANCE 493 

company whose business requires it, can often considerably lengthen 
the average time of settlement in certain lines of business. In some 
lines — especially when the sales are in large lots — sixty to ninety days, 
or even six months, are frequently allowed. For ninety days or over 
the debtor company generally gives a formal promissory note or else 
accepts a time draft which amounts to the same thing. 

It is good business policy for a company to take as much trade 
credit as it can get on advantageous terms and with safety. These 
two qualifications are worth elaborating. A company does not 
obtain trade credit on advantageous terms: (a) when by so doing it 
acquires a reputation for "slow pay" which makes dealers unwilling 
to quote to the company their lowest prices; (b) when by so doing 
it loses the benefit of cash discounts larger than the prevailing discount 
on bank loans — provided in this case that the company is not already 
borrowing as much as it should from banks. A company cannot 
accept trade credit with safety when by so doing its short-time 
liabilities are brought up nearly equal to its quick assets. Notice 
that the relation is not between total liabilities and total assets, but 
between quick liabilities and quick assets. A concern must have 
cash funds at hand to meet its accounts and bills payable when due 
and no other assets, no matter how available, will serve the purpose. 
A failure to realize just that simple fact has been responsible for many 
an unnecessary bankruptcy. 

We may infer from a study of representative balance sheets that a 
conservative company will not, as a rule, allow its accounts, bills and 
notes payable to run much over 75 to 80 per cent of its quick assets. 
This percentage is, in fact, not far from normal. It would be foolish 
to try to lay down any absolute rule where so much depends on the 
custom of each line of business, on the seasons, on the nature of the 
company's assets, on the ease with which bank credit may be secured, 
and on the general commercial outlook. 

Bank loans are not usually to be had except on first-class security 
and for short periods. (Discussion omitted, see p. 495.) 

Notes sold to the public as a source 0} funds may be used in order 
to raise funds from (a) concerns which supply merchandise, (b) banks 
or (c) the public. We have already seen how and to what extent they 
may be issued in the first two cases; we have now to consider the 
third case. 

The usual, although not a necessary, distinction between notes 
given in the ordinary course of trade or to banks and notes sold to 



494 BUSINESS ADMINISTRATION 

the public is in the length of time of the debt. In the first-named 
cases they do not usually run over six months. Notes sold to the 
public are more likely to run from one to ten years. Two or three 
years is about the average period, intermediate between sixty-days 
to six-months notes, on the one hand, and ten- to one-hundred-year 
bonds, on the other hand. They are issued in denominations varying 
from $100 to as high as $100,000. 

The chief objection to these instruments is that they do not appeal 
to any large dependable body of purchasers. The commercial banks 
do not care for them because they are not "quick" enough. Com- 
paratively few individual investors will buy them because they are to 
be cancelled within a comparatively short period, and the average 
individual investor does not choose to watch his investments closely 
and renew them frequently. His idea, on the contrary, is to get hold 
of a safe security that yields a steady return and to keep it indefi- 
nitely. The market for medium-term notes, therefore, is restricted, 
generally speaking, to persons of large means who are in fairly close 
touch with the financial world and who happen to have idle funds 
on hand. Such persons are most easily reached through the big 
financial houses and these houses almost invariably absorb note 
issues of any size and distribute them to their clients. 

On account of the limitations of the market it is always difficult to 
tell in advance whether an issue of medium-term notes will be taken 
up by the public or not. It is still more difficult — in fact, impossible — 
to tell at the time of issue whether the notes can be readily renewed 
when the time of payment arrives. No conservative corporation 
manager will put out such notes unless he has first provided for their 
payment when due. This he may do in two ways; either by saving 
the necessary amount out of the corporation's income or by securing 
through bond issues the funds with which to pay o3 the notes. The 
first course involves cutting down the borrowings of the corporation 
which, as has been pointed out, is likely to be undesirable. Ordinarily 
the second course would be inadvisable, for if bonds are to be put 
out at all they might as well be issued in the first place. 

This suggests the usual reason for the issue of notes to the public, 
namely, as a temporary expedient when a bond issue is for the time 
being deferred. 

Although notes for the public are generally simply unsecured 
promises to pay, they may, especially for the longer terms, be 
on certain definite property. A corporation's holdings of securities 



THE ADMINISTRATION OF FINANCE 495 

of other companies are frequently put up under a trust agreement 
as collateral. It is difficult to draw a line between long-time collateral 
trust notes and short- time collateral trust bonds; in fact notes and 
bonds merge into each other and the distinction between them is in 
some cases merely nominal. 

28. WHAT A BANK WISHES TO KNOW BEFORE 
MAKING A LOAN 

[The following is a sample of the blanks which banks require the 
prospective borrower to fill out before making a loan. Notice that 
the bank can learn many things concerning the soundness of the 
finances of the concern by studying the relationships of items.] 



Name (Corporate Style) 

Home Office Business 

Branches 



The following is a true statement of the financial condition of 

this corporation at the close of business on the day of 

19.. . and of all facts hereinafter set forth, made to The Chase 
National Bank of the City of New York, for the purpose of procuring 
credit and any other accommodations or benefits which may be 
requested. For such purposes, the bank may at any time assume 
that the condition and affairs of the corporation have continued 
substantially as good as herein set forth until notified by the corpora- 
tion to the contrary. The corporation agrees to immediately advise 
the bank of any substantial change in its condition or affairs. 



496 



BUSINESS ADMINISTRATION 



Fill All Blanks, Writing "No" or "None" Where Necessary 
STATEMENT OF STOCK 



Assets 
Cash on hand 










Liabilities 

Notes payable to own 
banks 










Cash in banks 










Due from customers: 
On open accounts. . . . 










Notes payable for paper 
sold through brok- 
ers 










On notes receivable . . 










Trade acceptances re- 
ceivable 










Notes payable for mer- 
chandise 










Due from controlled or 










Notes payable to others 
Accounts payable for 
merchandise pur- 
chased 










allied concerns: 
For merchandise sold . 










For advances made.. . 










Due from officers, direc- 
tors, employees, and 
stockholders 










Accounts payable to 
others 










Trade accept's pay .... 










Merchandise: 

Finished (how valued) 










Due to officers, direc- 
tors, employees, 
and stockholders . . 










In process (how val- 
ued) 










Deposits of money with 
Company 










Raw (how valued) .... 










Land (valued at cost, 










Time or demand. . . . 










mortgages, if any, in 
liabilities) 


Accrued expenses 










Mortgage debt 










Buildings (present value, 
mortgages, if any, in 
liabilities) 










When due 








1 


Interest rate 

Lien on what assets . 




Mchy. and equip, (pres- 
ent value, mort- 










Bonded debt 


gages, if any, in 
liabilities) 


When due 

Interest rate 

Lien on what assets . 










Furniture and fixtures. . 


% 








Stores, supplies, etc 










Deferred charges 










Other liabilities (item- 
ize) 


Investment in controlled 
or allied concerns. . 










Other bonds, stocks, and 




















investments (val- 
ued at cost) 


Capital stock, preferred 
Capital stock, common 
Surplus 


















Good-will 


















Patents 










Reserves (itemize) 










Other assets (itemize) 


















































Total 










Total 































THE ADMINISTRATION OF FINANCE 
PROFIT AND LOSS ACCOUNT 



497 



Total net sales for year, less returns 

Net trading profit (after all expenses, including deprecia- 
tion, interest, etc.) $ 

Other income $ 

Total income 

Dividends : 

P \ Otherwise disbursed $ 

Rate per cent paid in cash on preferred. . . .On common. . . 

Amount declared (not yet paid) $ 

Remainder of earnings carried to surplus 



CONTINGENT ASSETS AND LIABILITIES 



Endorsed bills receivable discounted 








Are these included in assets ? 

Accounts receivable pledged or assigned 








Are these included in assets ? 

Trade acceptances receivable discounted 








Endorsements for affiliated or other interests 








For guarantees 








Approximate amount of outstanding contracts and com- 
mitments, as of statement date, for purchase of mer- 
chandise 








Total 

















INSURANCE CARRIED BY CORPORATION WITH REGULARLY 
INCORPORATED AND LICENSED COMPANIES 



On merchandise 








On buildings and machinery 








Use and occupancy 








Life, for benefit of business 








Life, in name of 

















498 



BUSINESS ADMINISTRATION 
OTHER BANK ACCOUNTS 



Names of Banks 


Credit Lines 
Obtained 


On What Basis Is Accom- 
modation Obtained 
(Endorsements, Receiv- 
ables, Collateral, etc.) ? 




















































Total 





















COMMERCIAL LETTERS OF CREDIT 



If corporation imports merchandise against confirmed or 
unconfirmed commercial letters of credit, give total 
amount of credits outstanding on statement date 








Unmatured drafts drawn against these credits up to state- 
ment date 








Unused portion of commercial letters of credit outstanding 

















ENDORSEMENTS ON CORPORATION'S NOTES 





Responsibility of Endorsers Outside of 
This Business 


Names of Endorsers 


Personal Assets *jgj£ 


Net Outside 
Worth 


















































Total 

































Incorporated under laws of State of Date of charter . . . 

Incorporated under laws of State of Date of charter, 

Expiration of charter 

Authorized capital, preferred $ Issued capital, preferred 



common $ . 



common $ . 



Amount of stock issued by corporation for cash or property, other than good-will 

or services, preferred % 

common $ 

Total maximum indebtedness last year $ Date 

Minimum indebtedness last year $ Date 



THE ADMINISTRATION OF FINANCE 499 

MERCHANDISE 

Are goods shipped to branch houses carried on your books in merchandise account 
or accounts receivable ? 

Is any of your merchandise on hand held against trust receipts ? 

Give amount on statement date $ 

In what account is merchandise held against trust receipts carried on your books ? 

On statement date did you have on hand any merchandise 

consigned to you ? Give amount $ 

Was this consigned merchandise included in merchandise items of statement 
submitted ? 

Have you established any reserve for fluctuation in value of merchandise ? 

Give amount of such reserve on statement date $ 

Do selling offices or branches borrow locally, or otherwise ? Give 

amount so owing on statement date $ 

If selling offices or branches borrow, are their loans included in liabilities of parent 
concern ? 

Is there anything in by-laws of charter of corporation limiting its borrowing 
capacity ? What is limit ? 

Does corporation borrow on collateral ? What kind of collateral ? 

Give amount so owing on statement date 

Are there any unsettled claims, or suits pending, against corporation not appear- 
ing on books as liabilities ? Give amount $ 

Are preferred dividends cumulative ? Give amount in arrears, if any, on 

statement date $ 

On what basis is depreciation charted on buildings ? 

On machinery and equipment ? 

What is appraised value of buildings ? Of machinery and equipment ? 

Are books regularly audited by public accountants ? 

Give date of last audit 

Give names of accountants who made last audit 

If corporation sells commercial paper through brokers, or others, give names of 
such brokers (or others) 

Give date on which corporation regularly takes inventory and closes books 



(Note. — On the opposite side of this sheet are the names and addresses of the 
officers and directors.) 

29. BORROWING BY ASSIGNMENT OF ACCOUNTS 

RECEIVABLE 1 

For value received, we, the undersigned, have bargained, sold, 
assigned, transferred, and set over and by these presents do sell, assign, 
transfer and set over unto L. Spiegelberg & Sons, their successors 
and assigns, the claims and accounts more specifically set forth in the 
statement annexed hereto and made part hereof, which is a copy of 
the original claims and accounts, assigning, transferring and convey- 
ing to the said L. Spiegelberg & Sons all our right, title, and interest 

1 Taken by permission from C. W. Gerstenberg, Materials of Corporation 
Finance, pp. 908-9. (Prentice-Hall, 1905.) 



500 BUSINESS ADMINISTRATION 

in and to the same and in and to the merchandise, the sale of which 
created said accounts with full power to reclaim said merchandise as 
heretofore stated. 

To have and to hold the same unto L. Spiegelberg & Sons, 
their successors and assigns, and we hereby constitute and appoint 
said L. Spiegelberg & Sons our true and lawful attorneys irrevocably 
in our name or otherwise but to their own use and benefit to collect and 
receive all moneys due or to grow due upon said accounts and to col- 
lect, sell, assign, transfer, set over, compromise, or discharge the whole 
or any part of said accounts and to receive, reclaim, and without 
notice to us, dispose of the merchandise, the sale of which created 
said accounts (in the event that for any reason said merchandise in 
whole or in part shall come back upon said accounts) and for those 
purposes do all acts and things necessary or proper in the premises. 
This assignment is made for due and valuable considerations, having 
been paid to the undersigned by L. Spiegelberg & Sons and also is 
made in furtherance of an agreement about to be made between the 
undersigned and L. Spiegelberg & Sons and as further collateral 
security for the payment of any indebtedness arising as a result of 
said agreement and otherwise. 

We hereby guarantee payment of said account at maturity and 
hereby represent that the accounts so assigned are just and true and 
are the result of bona fide sales and that the merchandise, the sale 
of which created the accounts hereby assigned, belonged to us solely 
and absolutely and was not in whole or in part consigned to us and 
that the debtors therein named have agreed to accept the same; that 
no payment has been made on said accounts; that there are no set- 
offs or counterclaims thereto and that the terms of credit are as 
specified and that any and all remittances on said accounts coming 
direct to us shall be received by us in trust for L. Spiegelberg & Sons 
only and that the identical remittance in whatever form it may be 
received by us shall be immediately handed over to L. Spiegelberg & 
Sons and that all deductions on said accounts will be made good by 
us to L. Spiegelberg & Sons by payment of the same in cash or by 
payment of the same out of any balance to our credit in the hands of 
L. Spiegelberg & Sons, if any, and should the purchasers reject, 
return, or refuse to accept any or all of the merchandise mentioned in 
said accounts that we will immediately give notice thereof to L. Spie- 
gelberg & Sons and it shall then be optional with L. Spiegelberg & 
Sons to surrender to us the said merchandise refused, rejected, or 



THE ADMINISTRATION OF FINANCE 501 

returned upon receiving payment thereof in cash or if they so elect, 
to deduct from any balance which they may have on hand or out of 
any sum which they may thereafter have on hand to credit the amount 
of said merchandise. 

The said representations are made to induce Messrs. L. Spiegel- 
berg & Sons to make advances to us on the faith of the said accounts 
herein assigned by us. 

The said account so assigned by us shall in the event of the under- 
signed making an agreement with Messrs. L. Spiegelberg & Sons for 
further advances on other merchandise become part of the accounts 
under said contract and shall be treated in the same manner as pro- 
vided for in said contract. 

In Witness Whereof Company has hereunto set 

its hand and seal this day of December, 1910. 

L. S. 

By 



See also p. 413. Note Brokers, Commercial Paper, Commercial 
Credit and Discount Companies. 



30. THE MEANING OF DEPRECIATION 1 

[The following discussion of the meaning of depreciation in the 
railroad business gives a hint of some of the difficulties involved in 
figuring depreciation in any complex industry. It is one of the 
difficult financial problems which confront the manager of such a 
business.] 

Does depreciation mean the loss of value in a car or an engine due 
to wear and tear ? If so, this sort of depreciation is amply covered 
by proper maintenance; in other words, it is usual when an engine 
or car goes into the repair shop, whether damaged in an accident or 
by legitimate wear, to replace its worn-out or damaged parts and 
restore it to its original condition. Repairs are classed as "running 
repairs," by which are meant the repairs necessary to keep equip- 
ment in safe running condition; and "general repairs," by which 
are meant the repairs needed to restore the equipment to its original 
condition. There are plenty of cases on roads both in this country 

1 Adapted by permission from F. A. De]ano, "The Application of a Deprecia- 
tion Charge in Railway Accounting," Journal of Political Economy, XVI (1908), 
586-90. 



502 



BUSINESS ADMINISTRATION 



and in Europe, where locomotives and cars are so well maintained 
that there is no appreciable depreciation. Indeed, locomotives are 
running on English roads which are, though obsolete in many respects, 
as good as new, though fifty years old; and there are many cases upon 
roads in this country where engines and cars twenty-five years old 
have been so well maintained that they are as good as when originally 
built. 

In respect to buildings and other structures, their ultimate 
life depends entirely upon the character of maintenance and care. 
Wooden buildings well roofed and painted, repaired when necessary, 
will last indefinitely, and of course, structures of masonry or iron are 
even more permanent. Buildings and structures on railroads are 
rarely discarded except because they have outlived their usefulness, 
and something of a more efficient type is needed in their place. 

Diagram I 

Curve illustrating condition of equipment, buildings, or structures over a long 
period of time. Space along vertical lines represents value of equipment, etc. 
Space along horizontal lines represents time interval. 




From the foregoing it will be seen that if by depreciation is meant 
the loss due to wear and tear, it may be illustrated as to each piece of 
equipment or each building or structure, by a mathematical curve 
something like that indicated in the accompanying Diagram I. The 
distance from "A" to "B" represents the period of time in which 
under normal conditions the deterioration takes place; in the case of 
locomotives, say three years; in the case of passenger cars, say two 
years; in the case of freight cars, a very variable quantity, averaging 
perhaps three years; in the case of buildings and structures, depend- 
ing wholly on the character of the building and structure, climatic 
conditions, etc. The distance from "A" to "C" represents the 
diminution in value due to wear and tear down to the point where it 
becomes necessary to make extensive repairs. This is one view of 
what is meant by depreciation. 

Another view of depreciation is that it represents the amount by 
which the average condition of the physical property has deteriorated 



THE ADMINISTRATION OF FINANCE 



503 



below the original or new condition. It is assumed that each piece of 
physical property on the railroad, other than the real estate, is 
depreciating in value in the way represented by the curve already 
drawn, but that because the railroad is a composite of an immense 
number of units, the average condition of all the separate units 
combined is represented by a line at some point between the upper 
and lower nodes of this curve. Obviously, this will vary a little bit on 
the different roads according to the personal equation of management, 
local conditions, etc., which in turn are affected by good or bad 
business conditions. A corporation differs from an individual only in 
degree. In good times, expenditures for maintenance are liberally 
made: in hard times all expenditures of this kind which can be safely 
postponed necessarily cease. If then by depreciation is meant the 

Diagram II 

The result of composite curves similar to those shown below is a line or more 
strictly a band or zone representing average condition 



100 70 




drop for the original cost down to the average-condition value of 
equipment, buildings or structures, it is evident that there is a line, or 
more accurately, a band or zone somewhere between 100 per cent value 
and the 50 per cent value, and this band, speaking very liberally, will 
be somewhere between 60 per cent and 75 per cent of the original cost. 
It is obvious, however, that when the lower limit of this band which 
represents the average condition of the units is reached, depreciation 
does not continue farther, and that therefore if a regular fixed charge 
is to be made to cover this alleged loss of value the charge should 
cease at that point as the limit of actual depreciation of the units 
considered as a whole has been reached. 

Still a third view of depreciation is that it means the depreciation 
due to "obsolescence." It is argued that while each piece of equip- 
ment or every building or structure may be restored to its original 
condition, there is a diminution in value, due to obsolescence. Every 
manufacturer, as well as every corporation, fully appreciates this. 
In a country which is developing rapidly it is frequently necessary to 
discard perfectly good equipment, buildings, and structures, and to 



5°4 



BUSINESS ADMINISTRATION 



replace them with something more efficient. It is possible that 
conditions will warrant "writing off" the cost of such equipment or 
structures and charging to cost of operation the entire cost of renewal 
with more modern and more efficient tools or equipment. It may be 
argaed that this is the kind of depreciation which it is the business of 
the railroad to provide for by monthly charge in its operation. The 
difficulty is to estimate the rate at which such depreciation takes place. 
To illustrate it, we may represent such a depreciation as this by a 
mathematical curve for each piece of equipment, building and struc- 
ture, as shown in Diagram III. The difference between the curve in 
Diagram III and that of Diagram I lies in the fact that Diagram III 

Diagram III 

Diagram showing condition of equipment, buildings, and structures as in Diagram I, 
but taking into account depreciation due to obsolescence 

Rate of Depreciation Due to Obsolescence 



100% 
80 
60 
40 
20 




shows a depreciation due to obsolescence, whereas Diagram I does not. 
In III we make a line "A — D," which is at a slight angle to the 
horizontal. It represents the rate of depreciation due to obsolescence. 
It contemplates that every time a unit of equipment, a building or a 
structure, is restored to a condition "as good as new," it is not brought 
back to a value equal to that represented by its original cost, but to 
a value as much less than its original cost as the depreciation due to 
obsolescence may have brought it. To provide for this sort of 
depreciation it is obviously necessary to determine the rate of deprecia- 
tion due to obsolescence. Who shall say ? Shall we be guided in the 
future from the results in the past ? Shall we say in respect to loco- 
motives that because locomotives are now as high, as wide, and 
perhaps as long as they may be built, there can be no further develop- 
ments in that direction ? Or, shall we accept the arguments of those 
who believe in electric transportation, that the steam locomotive will 
soon be discarded and the electrically driven motor take its place ? 



THE ADMINISTRATION OF FINANCE 505 

In one case, the rate of depreciation due to obsolescence will be small, 
while in the other case, it can be determined only by our surmise as to 
how soon the revolution from steam to electricity is going to take place. 

31. THE SOURCES OF THE SURPLUS 1 

[This selection and the following one should be read not merely 
to learn descriptive facts concerning the surplus but to see financial 
policies being reflected in the surplus.] 

One possible, though very unusual, means by which a corporation 
obtains a surplus is by inheritance. Take, for instance, a corporation 
which is a consolidation of two companies, each having a surplus 
of its own. The consolidation may conceivably simply guarantee 
the bonds and other outstanding debts of the subsidiary companies, 
may issue dollar for dollar in stock for the stock of the subsidiary 
companies and may transfer the former surpluses bodily to its own 
accounts. We may dismiss this first possible source of surplus, then, 
with the statement that it is too uncommon to be worth much dis- 
cussion. 

The second source of surplus, which also is rather unusual, is the 
selling of the corporate stock or bonds above par. Evidently the 
corporation in such a case receives a sum of money greater in amount 
than the obligations which it incurs. Now this extra sum may be 
handled by an accountant in three or four different ways. One way 
is to include it in the corporation's surplus account. The propriety 
of this method may be disputed, but this is an accounting rather than 
a financial question. 

A surplus may originate, in the third place, in whole or in part 
from the sale of a corporation's fixed or semi-fixed assets. Thus if a 
manufacturing company owns a plant which has become obsolete and 
worthless for manufacturing purposes, and the value of which has 
been fully covered by a depreciation reserve — in other words, written 
off the books — and afterwards sells this plant, the sum resulting 
would go into the surplus account. Of course, the reader will under- 
stand that if the value of the plant in such a case had not been written 
off the books, but was still included in the corporation's balance 
sheet, the only effect of its sale would be a transfer of the amount 
received from the property account to cash or notes receivable or 
whatever was taken in payment for the plant. 

1 Adapted by permission from W. H. Lough, Corporation Finance, pp. 374-76. 
(Alexander Hamilton Institute, 1916.) 



506 BUSINESS ADMINISTRATION 

A similar source of surplus is a revaluation of the fixed assets of a 
corporation when the revaluation shows an increase in their value. 
This increase would naturally be represented on the liability side of 
the balance sheet by a corresponding gain in the surplus. Generally 
speaking — and it must be remembered that there are some exceptions 
to this rule — an upward revaluation of assets is not in accordance 
with correct accounting or financial principles. Therefore, this 
fourth source of surplus is not commonly found. 

This brings us to the fifth and most common source of surplus, 
namely, saving from income. The uses to which income should be 
put after the fixed charges and reserves had been provided for, are 
found to be dividends and surplus. It will do no harm to reiterate 
the important principle that the dividends of practically every corpora- 
tion should be maintained at a fixed rate and should move only to 
increase. Fluctuating dividends destroy the confidence of the 
investing public and greatly reduce the credit of the corporation 
below what it might possess. The proper policy, with few exceptions, 
is to ascertain the minimum net earnings of a company in the 
years of greatest depreciation and rigidly hold the dividends at or 
below that minimum. The rest of the net earnings will be trans- 
ferred to the company's surplus account. 

32. RESERVES AND OTHER USES OF THE SURPLUS 1 

"A surplus," says Henry R. Hatfield, "by whatever name it may 
be called, represents additional capital (normally derived from 
profits), the purposes for which it is created may be any of those for 
which capital is needed, or it may be used, as profits ordinarily are 
used, to provide means for paying dividends." Generally speaking, 
whether the surplus be hidden or shown on the face of the balance 
sheet, the proper purposes for which the surplus may be set aside 
by the board of trustees are the following: (1) to protect the corporate 
estate; (2) to improve the esprit de corps and increase the efficiency 
of the personnel of the service; (3) to increase the business of the 
corporation without increasing issues of share or credit capital; 
(4) to reduce the funded debt; and (5) to equalize dividends. 

At the discretion of the board of directors, the surplus may be 
utilized to protect the corporate estate against impairment, through a 
series of continued operating losses. One method of accomplishing 

1 Adapted by permission from F. A. Cleveland and F. W. Powell, Railroad 
Finance, pp. 168-76. (D. Appleton and Company, 191 2.) 



THE ADMINISTRATION OF FINANCE 507 

this end is to retain for the use of the corporation a margin of undivided 
profits to insure against losses which may be due to fluctuations in the 
volume of business, the net result of which might be to decrease the 
corporate estate. 

A second purpose for which a fund or reserve may be created out 
of surplus is to insure against casualties, such as fire, storm, flood, 
and accident, where insufficient provision has previously been made 
through current charges against revenue. In establishing the policy 
of the corporation and in managing its affairs, the board must decide 
whether the corporation will incur an expense in the nature of premi- 
ums paid to other companies for carrying such risks or carry the 
risk itself. 

A third purpose for which surplus may be distributed is to create a 
fund to recoup losses from bad debts or to serve as a reserve to pro- 
tect the company against the infidelity of officers and employees. The 
reasons for the company's carrying its own credit and fidelity insurance 
are practically the same as those above set forth for carrying its own 
insurance against casualties. The margin of saving, however, is 
very much larger, since the percentage of actual loss to the corpora- 
tion from bad debts and from infidelity is relatively small compared 
with premiums which would be paid. This also may be accomplished 
by setting aside a part of the surplus. 

A further provision may be made in like manner for protection 
of the corporate estate against depreciation due to failure to main- 
tain the property against wear and tear and waste from the elements. 
In similar manner, provision may be made for losses or deterioration 
due to obsolescence of type of equipment or the expiration of patents 
or other rights. While ordinarily such a fund would be created and 
maintained as a charge in the nature of current expense, and as such 
would be a deduction from earnings, failure to make ample provision 
for such protection in the past may suggest to the board the advantage 
of direct appropriation from surplus. 

Still another form of reserve is to be found in amounts set aside to 
protect the corporation against loss due to speculation in its securities, 
or to protect it against a temporary impairment of its credit. Usually 
this function is performed without a definite fund having been pro- 
vided or appropriated. It is not an uncommon practice for a corpora- 
tion's officers to watch the market in order that the price of its 
securities may not be unusually or harmfully depressed by traders who 
may seek to obtain advantage from a "raid." In some jurisdictions 



508 BUSINESS ADMINISTRATION 

it is made unlawful for a company to trade in its own securities; 
in such event it would be unlawful to appropriate or set aside a fund 
to protect its securities against speculative or other trading. 

The use of the surplus for the purpose of improving the esprit de 
corps or for increasing the efficiency of the personnel of the corpora- 
tion takes several forms. Amounts may be set aside as a fund to 
indemnify employees for time lost and personal expense caused by 
illness, injuries, etc. The advantage of so doing is apparent. The 
sympathy and interest of employees is a valuable asset of the corpora- 
tion. It not only tends to increase working efficiency, but it also 
enables the corporation to deal with employees on a more favorable 
wage basis. To the same end, funds may be provided or set aside as 
a pension fund. This may be done through an appropriation from 
surplus or through a direct charge against income. In like manner 
appropriations may be made for education, recreation, and social 
improvement of employees. Thus appropriations are made to local 
branches of Christian associations; social centers are established and 
maintained for the employees of a particular corporation; and 
contributions may be made to social organization and entertainment 
centers which are established and maintained for the benefit of 
several railroads. 

More frequently than for other purposes the surplus is used to 
increase the business of the corporation without increasing its out- 
standing shares or bonded debt. To this end surplus may be appropri- 
ated for extensions into new territory for improving the facilities for 
doing business, for improving the road, for acquiring new equipment 
for use within territory already occupied, for constructing or acquiring 
enlarged terminal facilities, or for acquiring properties and equipment 
which may be used in collateral enterprises such as steamboats, 
mines, quarries, and timber. Assuming that added properties or 
equipment are desirable, the board has before it the option of deciding 
whether new securities will be issued or a portion of the surplus 
applied to such use. 

Surplus may be set aside to increase the working capital of the 
corporation; for the purpose of increasing the cash, stores, and other 
assets available for handling the current business, or for increasing 
credit accounts of customers. Seldom, however, is this accomplished 
through a definite appropriation or funding measure, but usually, 
when the surplus is not hidden, through carrying the amounts as 
undivided profits or in the general surplus account. 



THE ADMINISTRATION OF FINANCE 509 

A further use of surplus for increasing the business of the corporation 
is found in actions taken to purchase the securities of other corpora- 
tions. This is one of the most effective methods of establishing con- 
nections and obtaining more effective working relations with other lines. 

Many considerations may be present which would move a board of 
directors to appropriate or set aside funds for the reduction of the 
funded debt. Common among these is the contractual obligation 
established at the time bonds are issued, creating a sinking fund. 
Under such contracts, it is usually made obligatory to set aside a 
definite amount each year which when invested will provide the 
means for retiring bonds or mortgage indebtedness when due. With- 
out such obligation having been entered into, however, and as a 
matter of policy, it may be deemed expedient to reduce fixed charges. 
When the business of the corporation is unusually large, the creation 
of such a fund may not interfere with the declaration of dividends 
which will be satisfactory to shareholders; and in time of business 
depression or lighter traffic, the fund may operate to increase the net 
income accruals or to decrease charges to such an extent as to protect 
the management from financial embarrassment and even make 
possible the payment of dividends. 

More directly, dividends may be equalized by appropriating or 
setting aside a definite reserve. When a road is so located that it 
must depend for earnings largely on freight traffic and on long haul 
business, the fluctuations over a period of years may be so great that 
without such a reserve it would be impossible to pay dividends with- 
out depleting the capital invested. 

All of these and still other funding purposes may be subserved 
by the board of directors in the exercise of their proper discretion in 
the management of surplus. The shareholders have no rights to 
any part of the earnings or profits until a definite fund has been set 
aside for distribution to them in the form of dividends. 

When the surplus is put back into permanent properties, or 
invested or set aside as specific reserves for purposes other than 
dividends, it is not usually available for distribution to shareholders, 
for it becomes so far merged in the general assets of the corporation 
that it cannot be readily converted into cash. Under such cir- 
cumstances the only methods which the board may utilize to enable 
them to distribute the surplus as dividends are either to issue bonds 
against the invested surplus, to declare share dividends, or to dis- 
tribute certificates of beneficial interest in properties which are not 
essential to the road. 



510 BUSINESS ADMINISTRATION 

S3. HOW ONE FIRM PULLED THROUGH A DEPRESSION 1 

Little more than six months ago [this article appeared in July, 
192 1] Henry Ford had all but completed arrangements for borrowing 
$75,000,000, and in the face of what appeared desperate necessity. 
His plants were closed; there was little demand for his cars; he owed 
the Government $55,000,000 in taxes; notes for nearly $30,000,000 
originally issued to buy out his minority partners were due within a 
few weeks; a bonus of $7,000,000 was due his employees; whereas 
cash and treasury bonds together aggregated only $33,000,000. 

Yet Ford did not borrow from banks. He paid them up and today 
his sales are the greatest in history. How was the corner turned ? 
He has told his own story of the triple-faced wedge which he used 
to open the path that led his industries to a new prosperity. The 
three faces of this wedge were (1) the shipment of surplus cars, 
(2) ruthless economies, (3) transportation. The first thing which he 
did was to transfer the load. He had 125,000 surplus cars on his 
inventory and he pushed them off his inventory account into the 
hands of his 17,000 dealers. An Indiana dealer had his floor full of 
Fords. Imagine his consternation when a trainload rolled, unordered, 
into the city. His business future was at stake. He must and did 
accept the draft, but he could not pay for the cars. A former dis- 
gruntled Ford leader with superior resources bought the trainload at 
wholesale and startled the countryside by advertising a bargain sale 
of Fords. In other cities and towns the dealers went to their banks 
and borrowed on the cars. Shipments averaged about a tenth of a 
year's business and the credit was quickly obtainable. The cash 
flowed back into Detroit and by the middle of April lord had not 
only paid up the current quarter's Federal taxes, but had anticipated 
payment on the remaining $26,000,000 of his purchase notes. 

The unloading plan was a success because it was economically 
sound and ruthlessly applied. Agents were bluntly told they were 
indebted to the Ford company and that to prosper in the future they 
must assist now. Those who rebelled were removed. Those who 
accepted are today the strongest proponents of the Ford methods. 
At the end of April Ford's inventory had been reduced from 
$105,000,000 to $63,800,000. He had been manufacturing his inven- 
tory, including spare parts, into finished car shipments to dealers 
which went out with drafts attached. At the above date there was 

1 Adapted by permission from the Wall Street Journal, Vol. LXXVIII, No. 10 
(1921), pp. 1, 3, and Vol. LXXVIII, No. 18 (1921), p. 1 



THE ADMINISTRATION OF FINANCE 511 

reported due him more than $40,000,000 representing finished cars, 
probably 80,000 of them, shipped out and accepted by dealers and 
carried on the company's books as an asset. This item increased 
$28,000,000 from the first of the year. 

The second method which he used was that of economies in his 
business. He combed his entire organization. Where he formerly 
employed 60,000 men to produce an average of 4,000 cars daily he 
now obtains an output of 4,500 daily with 45,000 men. The $6 
minimum wage has been retained, but foremen have been put to work, 
tasks doubled up and adjustments averaging 20 to 25 per cent reduc- 
tion made in wages. He did not confine his combing to his factories. 
He came East and found $91,000,000 in "frozen" cars and parts in 
New York, Philadelphia and Boston. Changes in personnel followed 
and others were threatened. The cars began to move out. Mr. 
Ford said: 

Office and factory came in for a housecleaning. Back in November, 
1920, our daily expense for labor and commercial overhead charges,. cost of 
material not included, averaged $463,200 to get out an average of 3,146 cars 
daily, or $146 a car. Now for $412,500 a day we produce an average of 
4,392 cars daily, or $93 a car. Formerly fifteen men were employed per 
day per car. Now it requires only nine. 

We went through the offices and cut out a lot of jobs created during the 
war. We literally took out and sold a trainload of desks. We told the 
men that occupied these desks that back in the shops there were plenty of 
good jobs at good pay, if they wanted them. Most of them did. We cut 
the office forces from 1,074 persons to 528. Telephone extensions were cut 
about 60 per cent. Interesting but useless statistical systems were abolished. 

We went through the shops in the same way. During the war we had 
a foreman for about every three to five men. Too many foremen sat at 
desks looking on. We sold all the desks and put most of the former foremen 
working. We now have a foreman for about every twenty men. Every- 
body and everything not producing was put in a position where it could 
produce or was eliminated. 

By April 1 conditions had so far improved that factories were 
again running full tilt. Here enters the previously unemphasized 
matter of transportation. He began to use his Detroit & Ironton for 
all inbound and outbound shipments possible, making connections 
with east and west lines at advantageous points along the road. 
Mr. Ford said: 

Before we got control of this road, it required an average of twenty- two 
days to haul raw material to the factories, make it into cars and get it to 



512 BUSINESS ADMINISTRATION 

the dealers. The money tied up stood continually at about $88,000,000. 
Now that time has been cut to fourteen days. We will cut it still more. 
Where we had $88,000,000 tied up to make 93,000 cars a month we now 
make 114,000 cars a month with $60,000,000. This freed $28,000,000 for 
other purposes. 

Since April a further remarkable spurt in Ford business has taken 
place. Cash the first of June was around $36,000,000 and there were 
no outstanding obligations except current merchandise acceptances. 
The measure of sales since that time and now, is factory capacity and 
not merchandising efforts. 

E. Organization for Financial Administration 

In view of the importance of the subject and the length of time it 
has been studied it is quite surprising that there is only a meager and 
unsatisfactory literature on organization for financial administration. 
It is even more surprising to find that business practice in this field 
is quite uncertain and mixed, not to say chaotic. There is no telling 
what one will find in the "financial department" and no telling what 
titles its functionaries will bear. Usually there is a "treasurer." 
His duties may range from those connected with occasional con- 
sultation on financial policies or those connected with being little 
more than a custodian of cash to those involved in drawing a budget 
and handling all financial and accounting matters. Sometimes there 
is a "comptroller." He may merely have charge of the accounting, 
or he may, at the other extreme, be responsible for the original 
budgeting of the business and then for such supervision as may be 
necessary to carry out the budget, or his duties may be arranged in 
some other way. There may be an "auditor," a "credit man," and 
others. 

It is apparent that we shall gain little from digesting either the 
literature or the current practices of business in our study of the 
" set up " of a business for financial administration. There is, however, 
certain common-sense material which is worth surveying. 

If we picture an organization in which the financial department 
has reached such large development as to have at its head a "vice- 
president in charge of finance" it is clear that it may be charged with 
the following responsibilities (and if it is not charged with them they 
must be cared for elsewhere in the organization). (1) The vice- 
president in charge of finance should, in consultation with the president 
and general manager, draw up a plan of the ways by which the financial 



THE ADMINISTRATION OF FINANCE 513 

needs of the business may be met. In some business organizations 
this includes the responsibility of preparing the budget which fore- 
casts these financial needs. It is better organization in most cases, 
however, to assign the preparation of the budget to a special assistant 
connected directly with the office of the president and general manager, 
or to a department of standards and records. (2) Within this plan 
he must work out the details of institutions and devices which are 
to be utilized and the details of how and when to utilize them. (3) He 
should carry out the operations necessary to bring these detailed plans 
to accomplishment. (4) He is of course the custodian of receipts and 
the agency through whom payments of funds are to be made. These 
are his routine duties as "cash custodian." 

It is, furthermore, appropriate that he should be charged with the 
responsibility for safekeeping financial documents. It is assumed 
that he will have under him whatever staff may be necessary to carry 
out these duties. 

It is not unusual for the entire accounting of the concern to be 
under the direction of such a vice-president in charge of finance. 
This is quite an understandable procedure in the case of a small 
concern where, indeed, the treasurer may actually be also in active 
charge of the books. In a large concern it is certainly arguable that 
the accounting work should be assigned to another department, such 
as a department of standards and records, thus leaving the vice- 
president in charge of finance free for more important duties. 

It is not unusual, also, for such a vice-president to be given 
functions which are ordinarily associated with the term " comptroller. " 
In such an event he would keep check on the way in which the various 
departments are measuring up to such responsibilities as rest upon 
them in connection with the financial plan of the business. For 
example, he would be vitally concerned in the ability of the sales 
department to cause the planned income to flow in and to keep within 
their planned expenditures, not in the sense that he should supervise 
their activities in their own field, but in the sense that he would be 
responsible for securing conformance to the authorized budget. It is 
obvious that it is entirely arguable that such "comptrollers' functions" 
might equally well (probably better) be assigned to the department 
of standards and records. 

In our attempt to visualize a possible organization for financial 
administration we should be able to see the matter more clearly if 
we had already discussed budgeting (see p. 831). We have, however, 



514 BUSINESS ADMINISTRATION 

seen enough of what is involved in budgeting (see page 337) to enable 
us to proceed. 

Only a few pages are necessary to give sufficient material for our 
present purposes. We begin (Selection 34) with a general order 
issued by one manufacturing concern in the process of defining the 
jurisdiction of its treasurer. It will be worth the student's while to 
draw a possible organization chart based on this general order. We 
then look (Selection 35) at some organization charts dealing with 
various aspects of financial administration. A selection (No. 36) on 
financial standards serves to remind us that we have already become 
aware of the existence of standards in the field (see pp. 333, 385) and 
to indicate their work and importance. Selection 37 shows concretely 
one device which the vice-president in charge of finance may use in 
planning to meet the financial needs of the business. 

PROBLEMS 

1. Draw up an organization chart based on Selection 34. Does this cover 
the whole organization for the administration of finance ? 

2. It was stated that the vice-president in charge of finance has the 
responsibility for drawing up a plan of the ways by which the financial 
needs of the business may be met. Give this statement specific con- 
tent. Do the earlier sections of this chapter give material which will 
be helpful in this connection ? 

3. An important school of thought believes it wise to differentiate planning 
and operation in business. Does the material on page 513 do this? 
Are they always to be differentiated in an organization chart ? 

4. What is meant by saying that it is a use of the principle of "checks and 
balances" when "comptrollership" is separated from "treasureship" 
in a business organization ? 

5. What are the arguments for having credits and collections in the sales 
department ? in the financial department ? What is your conclusion 
concerning the proper place ? 

6. What grounds can you give for the position that it is better to have 
the preparation of the budget in the hands of an "assistant to the 
president" than in the hands of a vice-president in charge of finance? 

7. What are the grounds for saying that "comptrollership" with respect 
to the budget should rest with the vice-president in charge of finance ? 
with an assistant to the president? with a department of standards 
and records ? 

8. What difference of "flavor" do you sense between "accounting depart- 
ment" and "department of standards and records"? 

9. Could a bank more advisedly make a loan on the basis of a budget 
than on the basis of the material set forth (p. 495) in the reading 
"What a Bank Wants to Know before Making a Loan" ? 



THE ADMINISTRATION OF FINANCE 515 

10. "The policy used in extending credit and in making collections should 
be harmonized with the remaining body of policy of the business 
establishment." Explain. 

11. Using Selection 3 5 A, pick out the parts of the chart which have to do 
with financial administration. Are all items cared for ? 

12. Are you sure that Selection 35B belongs in a section on financial 
administration ? 

13. Draw up an outline of as many kinds of financial standards as you can 
think of. 

14. Write a paragraph on the significance of financial standards. 

15. Where do financial standards come from? How does a business get 
them? 

16. Distinguish between an "income and expenditure" budget and a 
"receipts and disbursement*" budget. What use can a vice-president 
in charge of finance make of such a budget as is sketched in Selection 37 ? 

34. AN ORDER DEFINING THE JURISDICTION OF A 

TREASURER 1 

A. Explanatory note. — The jurisdictions defined hereinbelow extend 
to all subsidiaries of the company, except where specifically 
limited to the company. 

B. Definition of jurisdiction. — The treasurer will control the following 
functions, either directly or through the proper line executives, 
as provided under C. (omitted) hereinafter: 

1. Credits and collections 

a) Credits 

(1) Passing on the credit of all customers either on individual 
transactions or through O.K. lists 

(2) Passing on the credit of vendors on request 

(3) Supervising the methods of gathering credit data by the 
sales force 

(4) Reviewing sales terms from the standpoint of credit 

(5) Furnishing other companies with data as to customers' 
credits 

b) Collections 

(1) Determining the manner and place of incoming remit- 
tances 

(2) Recording all moneys received 

(3) Receipting, where required, for such remittances and 
indorsing for it, all incoming drafts and checks 

1 Adapted by permission from General Order No. 57 of the Walworth Manu- 
facturing Company. 



516 BUSINESS ADMINISTRATION 

(4) Preparing and issuing all collection "duns"; drawing 
all drafts against the company's and its subsidiaries' 
debtors; conducting all personal collection work and 
all arrangements for collecting through agencies or 
attorneys 
c) Financial claims 

Functional control, including supervision of correspondence 
and approval of adjustments by claim department having 
jurisdiction over the handling of all customers and inter- 
company claims arising out of questions of exchange, cash 
discount, interest, insurance, and other financial matters 

2. Custody and maintenance of funds 

a) Cashing all receipts other than cash 

b) Depositing all cash checks and cashed receipts 

c) Setting up and maintaining all petty cash funds 

d) Making all transfers of funds between depositaries 

e) Negotiating all short-time loans necessary to meet the 
current obligations of the company under the borrowing 
limits set by the president, and subject to the counter- 
signature of the president, a vice-president, or a director 

3. Disbursements 

Disbursing all moneys, subject to proper voucher authoriza- 
tion, including arrangements with transfer agents in connection 
with payment of dividends 

4. Taxes 

Preparing all tax returns required by governmental authorities 

5. Insurance 

a) Determining the amount of insurance and kinds of policies 
required to afford all necessary insurance protection, 
subject to the stipulations of the by-laws as regards surety 
bonds and to the instructions of the directors as to the basis 
of valuation in the case of fire and marine insurance 

b) Placing such insurance 

6. Real estate 

Purchasing, mortgaging, leasing, renting, and selling all real 
estate, subject to the approval of the president or Executive 
Committee or Board of Directors in the case of the Walworth 
International Company, where the transaction exceeds 
$1,000.00 in amount, and subject to the approval of the Board 
of Directors in the case of the sale or lease of any of the capital 
assets of the company 



THE ADMINISTRATION OF FINANCE 517 

7. Sale of securities 

a) Recommending for decision by the boards of directors as to 
the need for and form of all new security issues 

b) Selling, either direct or through banks or syndicates, the 
company's subsidiary companies' securities, including the 
publication of all literature and advertising connected there- 
with, subject to the authorization of the boards of directors 

8. Purchase of securities 

Purchasing all outside securities and buying in all company's 
and subsidiaries' securities, as authorized by the boards of 
directors 

9. Financial statements and notices of dividend declarations 

a) Publishing and issuing all printed reports of the financial 
condition and progress of the company, other than those 
covered under A, 7 b 

b) Issuing all notices of the declaration of dividends 

10. Custody of corporate books, financial documents, and cor- 
porate seal 

a) Custody of all corporate books 

b) Custody of all contractual title-vesting and negotiable docu- 
ments, representing the property and obligations of the 
company and its subsidiaries 

c) Custody and responsibility for affixing of all corporate seals 

11. Financial program 

a) Approving all major appropriations as to availability of 
funds and all general reductions in selling prices as per 
General Order No. 41 



5i8 



BUSINESS ADMINISTRATION 



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THE ADMINISTRATION OF FINANCE 



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520 BUSINESS ADMINISTRATION 

36. FINANCIAL STANDARDS 
In financial administration as in other phases of business 
administration standards of performance are of great assistance, 
especially if these standards are the result of careful study rather than 
of blind tradition. In some cases the study must be made by the 
firm concerned in terms of its own peculiar circumstances; in other 
cases, the standards may be of wider application and associative 
study may well be made. 

This is an appropriate occasion for reviewing the list of questions 
prepared by a group of business men concerning financial manage- 
ment (pp. 385-87) for that list of questions was in large part a list 
of standards which were being sought. We may also wisely look at 
certain other selections dealing with standards in other fields. 



See also p. 221. Some Aspects of Rating Scales. 

p. 325-40. Measuring Aids in Sales Management, 
p. 370. Testing in Connection with Purchasing. 



• 37. BUDGETING FOR CASH RECEIPTS AND CASH 

DISBURSEMENTS 1 

[The following selection is written with the underlying hypothesis 
that a staff assistant to the president is charged with " general control 
and supervision over the preparation and execution of the budgetary 
program." It should be read with this organization scheme clearly 
in mind (compare pp. 831-38).] 

1. The staff assistant to the president, working in conjunction 
with the treasurer, will prepare estimates of cash receipts and cash 
disbursements for the budget period. 

2. In preparing the estimate of cash receipts, the following will 
be necessary: (a) the accounts receivable outstanding at the beginning 
of the budget period will be analyzed and the estimated monthly 
receipts from these determined; (b) the accounts receivable resulting 
from the estimated sales will be determined and an estimate made of 
the monthly collections from these; (c) if any notes are held by the 
company, the estimated monthly receipts from these must be deter- 
mined. 

1 Adapted by permission from Budgetary Control for Business, pp. 1-1 7. (Boston 
Chamber of Commerce, 1921.) Prepared under the direction of J. O. McKinsey. 



THE ADMINISTRATION OF FINANCE 



521 



3. In preparing the estimate of cash disbursements, the following 
will be necessary: (a) the treasurer will prepare an estimate of the 
disbursements for taxes, insurance, interest, and other items which 
are under his control; (b) the accounts payable outstanding at the 
beginning of the budget period will be analyzed and the estimated 
monthly disbursements in payment thereof determined; (c) the 
accounts payable which will be contracted in connection with the 
various estimates calling for disbursements will be determined and 
an estimate made of the monthly disbursements required in payment 
of these. 

4. The form of the estimate of cash receipts, the estimate of cash 
disbursements, and the summary of cash receipts and disbursements 
is shown below. 



Summary of Cash Receipts and Disbursements 
For Quarter Ending March 31, 1922 



Disbursements 
Receipts 
Loans required 



January 



February 



March 



Total 



Estimated Cash Receipts 
For Quarter Ending March 31, 1922 



Source 
Accounts receivable* 
Customers — Class A 
Schedule No. 1 
Customers — Class B 
Schedule No. 2 
Customers — Class C 
Schedule No. 3 

Notes receivable 
Not discounted 
Schedule No. 4 

Sales 

Customers — Class A 
Schedule No. 5 
Customers — Class B 
Schedule No. 6 
Customers -Class C 
Schedule No. 7 
Total 



January 



February 



March 



Total 



*The classification of accounts receivable is on the basis of the terms of credit on which sales 
are ma^" 



$2* 



BUSINESS ADMINISTRATION 



Estimated Cash Disbursements 
For Quarter Ending March 31, 1922 



Purpose 
Notes payable 
Accounts payable 
Outstanding, Jan. 1 
Estimated cash disburse- 
ments for purchases 

Factory pay-roll 
Department A 
Department B 
Department C 

Factory expense 
Department A 
Department B 
Department C 

Departmental expense 
President's office 
Treasurer's department 
Auditor's department 
Purchasing department 
Office manager's depart- 
ment 
Traffic department 
Sales department 
Production department 

New equipment 
General 

Taxes 

Insurance 

Interest 

Miscellaneous 
Total 



January j February 



March 



Total 



REFERENCES FOR FURTHER STUDY 

Moulton, The Financial Organization of Society. 

Jones, The Administration of Industrial Enterprises , chaps, ii, xxi. 

Lough, Business Finance. 

Walker, Corporation Finance. 



CHAPTER VI 

THE ADMINISTRATION OF PRODUCTION 

Purposes of this chapter: 

i. To secure an appreciation of the spirit of modern production 
and to see how this spirit came into being. 

2. To get an understanding of the outstanding problems in pro- 
duction control. 

3. To see something of what is involved in so-called scientific 
shop management. 

The word production is another term which has several meanings. 
Most economists use the term to include all the steps involved in 
getting goods into the hands of the ultimate consumer. Thus, to 
the economist the term includes (a) those processes which change 
the form of goods (confer form utility) ; (b) those which move goods 
from places of less need to places of greater need (confer place utility) ; 
(c) those which keep goods from times of less need to times of greater 
need (confer time utility); and (d) those which are concerned with 
transfer of possession and ownership (confer possession utility). 
The business man ordinarily uses the term production to mean only 
those processes which are concerned with conferring form utility, 
and we shall use the term as it is used by the business man. 

Even with this narrowing it is a tremendously broad term. At 
the very least it includes all the primary industries and all manu- 
facturing industries (see p. 2) and it is quite arguable that it includes 
more. We are, of course, primarily interested in manufacturing 
industry. Even in this one field the range of activity is very great. 

A. The Background of Modern Production 

Production in some form goes back to man's first attempt to 
modify his environment. It developed slowly and painfully to the 
kind of tool industry which characterized medieval productive activity, 
and continued down to the time of the Industrial Revolution. That 
Revolution marks the transition to a very different kind of production, 
different both in the character of its processes and in the character of 
its contribution to human well-being. 



524 BUSINESS ADMINISTRATION 

We have come to call this new kind of production, technological 
industry. This term is intended to indicate that man has turned, 
and is more and more turning, to science to get means and methods of 
harnessing the forces of nature to do his work. Our first task is that 
of securing an appreciation of the environment in which modern 
production is conducted. 

PROBLEMS 

i. Readings 1-5 perhaps give the impression that the Industrial Revolu- 
tion was entirely dependent upon the coming in of science and tech- 
nology. Do you know what part was played by the development of 
(a) financial institutions, (b) markets and market institutions, (c) labor 
supply ? 

2. There have been periods of great progress in the past and these periods 
have frequently been short-lived. Is there anything about modern 
scientific methods that justifies an expectation that our progress will 
continue? 

3. What do you understand to be the essence of scientific method ? Is it 
applicable to business problems ? 

4. What is your explanation of the outburst of activity at the beginning of 
the nineteenth century shown on the chart on page 530 ? 

5. Reading 2 gives us a hint of the contributions botany and physics may 
make to production. What can geology contribute? chemistry? 
psychology ? mathematics ? Be specific. 

6. Notice the period in which there occurred the development of schools of 
technology. Can you relate this to developments in the field of 
marketing ? finance ? personnel ? 

7. How do you explain the great development of such schools in a 
relatively new country like the United States ? 

8. You now have certain facts before you concerning the engineering pro- 
fession. These people seem to be engaged in harnessing the forces of 
nature to gratify our wants. If they are to be managers in industry, 
is scientific training in itself sufficient ? 

9. What does technological industry mean to you ? Is it synonymous 
with machine industry? Could we properly characterize agriculture 
today as technological industry ? 

10. You are a general manager of a manufacturing and selling business and 
you have a limited scientific background. How are you going to handle 
problems of building construction, power, plant layout, and equipment ? 

11. Write out the arguments for and against a requirement of physics 
and chemistry in a business curriculum. 

12. Why is it any concern of ours what intellectual effects machinery may 
have? 



THE ADMINISTRATION OF PRODUCTION 525 

13. Be certain that you can explain in definite terms the relationship between 
technological industry and indirect costs in industry; between indirect 
costs and large-scale production. 

14. What effect has the coming in of technological industry had upon ease or 
difficulty of control in industry ? Explain in detail. 

15. "Standardization is the magic word which reveals the circumstances 
under which an industry lends itself readily to machine methods." 
What does this mean ? Standardization of what ? 

16. Make a list of the advantages and disadvantages of standardization. 

17. "The significant thing about the coming in of machinery is that it meant 
a transfer of thought, skill, and intelligence." What does this mean ? 
What has been the effect of this transfer upon (a) apprenticeship, 
(b) competition among workers, (c) the bargaining relation between 
employer and employee, (d) the development of large-scale production, 
(e) the development of impersonal relations, (/) the development of 
working-class solidarity ? 

18. Draw up a statement of the effect of the machine upon the laborers 
who work in machine industries; upon other laborers. 

19. One writer says that machine methods have profoundly influenced 
our mental outlook. How could this be true ? Have these methods 
had sufficient time or have they covered a sufficient proportion of our 
human activities to have had a profound influence of this sort ? 

20. When we speak of industry in 1750 as having been "simple" and of 
industry today as being "complex," what do we mean? What are 
the component elements of this simplicity or complexity ? 

21. Nowadays one machine completes the process of pin-making which in 
Adam Smith's day occupied ten men. Has there been an increase or a 
decrease in specialization ? 

22. Write a paragraph developing the theme "the background of modern 
production.' ' 

1. A BRIEF OUTLINE OF THE HISTORY OF SCIENCE 1 

The nineteenth century, and particularly the hundred years in 
which we are now interested, must always stand out in the history of 
the world as the period which has combined the greatest development 
in all departments of science with the most extraordinary industrial 
progress. 

So far as man's thought was constructive, the early results were 
systems of philosophy, and explanations of the order of things as seen 

1 Adapted by permission from E. S. Dana, "The American Journal of Science 
from 1818 to 1918," in A Century of Science in America, pp. 1-20. (Yale Uni- 
versity Press, 1918.) 



526 BUSINESS ADMINISTRATION 

from within, not as shown by nature herself. We date the real 
beginning of science with the Greeks. 

The bringing together of facts through observation alone began, 
to be sure, very early, for it was the motion of the sun, moon, and 
stars and the relation of the earth to them that first excited interest, 
and, especially in the countries of the East, led to the accumulation 
of data as to the motion of the planets, of comets, and the occurrence 
of eclipses. But there was no co-ordination of these facts and they 
were so involved in man's superstition as to be of little value. In 
passing, however, it is worthy of mention that the Chinese astro- 
nomical data, accumulated more than two thousand years before the 
Christian era, have in trained hands yielded results of no small 
significance. 

It was the branches of mathematics, as arithmetic and geometry 
and later their applications, that were first and most fully developed : 
in other words, those lines of science least closely connected with 
nature. The geometry of Euclid (about 300 B.C.) was marvelous in 
its completeness as in clearness of logical method. Hipparchus 
(about 160-125 B.C.) gave the world the elements of trigonometry 
and developed astronomy so that Ptolemy 260 years later was able 
to construct a system that was well developed, though in error in the 
fundamental idea as to the relative position of the earth. It is inter- 
esting to note that the Almagest of Ptolemy was thought worthy of 
republication by the Carnegie Institution only a year or two since. 
This great astronomical work, by the way, had no successor till 
that of the Arab Ulugh Bey in the fifteenth century, which within a 
few months has also been made available by the same Institution. 

To the Alexandrian school also belongs Archimedes (285-212 B.C.), 
who, as every schoolboy knows, was the founder of mechanics and in 
fact almost a modern physical experimenter. He invented the water 
screw for raising water; he discovered the principle of the lever, which 
appealed so keenly to his imagination that he called for a fulcrum on 
which to place it so as to move the earth itself. He was still nearer 
to modern physics in his reputed plan of burning up a hostile fleet 
by converging the sun's rays by a system of great mirrors. 

To the Romans, science owes little beyond what is implied in their 
vast architectural monuments, buildings, and aqueducts which were 
erected at home and in the countries of their conquests. The elder 
Pliny (23-79 a.d.) most nearly deserved to be called a man of science, 
but his work on natural history, comprised in thirty-seven volumes, 




THE ADMINISTRATION OF PRODUCTION 527 

is hardly more than a compilation of fable, fact, and fancy, and is 
sometimes termed a collection of anecdotes. 

With the fall of Rome and the decline of Roman civilization 
came a period of intellectual darkness, from which the world did not 
emerge until the revival of learning in the fifteenth and sixteenth 
centuries. Then the extension of geographical knowledge went hand 
in hand with the development of art, literature, and the birth of a 
new science. Copernicus (1473-1543) gave the world at last a sun- 
controlled solar system; Kepler (1 571-1630) formulated the laws 
governing the motion of the planets; Galileo (1564-1642) with his 
telescope opened up new vistas of astronomical knowledge and laid 
the foundation of mechanics; while Leonardo da Vinci (1452-1519),' 
painter, sculptor, architect, engineer, musician, and true scientist, 
studied the laws of falling bodies and solved the riddle of the fossils 
in the rocks. Still later Newton (1642-1727) established the law of 
gravitation, developed the calculus, put mechanics upon a solid basis, 
and also worked out the properties of lenses and prisms, so that his 
Optics (1704) will always have a prominent place in the history of 
science. 

From the time of the Renaissance on science grew steadily, but 
it was not till the latter half of the eighteenth century that the founda- 
tions in most of the lines recognized today were fully laid. Our 
standpoint in the early years of the nineteenth century may be briefly 
summarized as follows: A desire for knowledge was almost universal 
and, therefore, also a general interest in the development of science. 
Mathematics was firmly established and the mathematical side of 
astronomy and natural philosophy — as physics was then called — was 
well developed. Many of the phenomena of heat and their applica- 
tions, as in the steam engine of Watt, were known and even the true 
nature of heat had been almost established by our countryman, 
Count Rumford; but of electricity there were only a few sparks 
of knowledge. Chemistry had had its foundation firmly laid by 
Priestley, Lavoisier, and Dalton, while Berzelius was pushing rapidly 
forward. Geology had also its roots down, chiefly through the work 
of Hutton and William Smith, though the earth was as yet essentially 
an unexplored field. Systematic zoology and botany had been firmly 
grounded by Buffon, Lamarck, and Cuvier, on the one hand, and 
Linnaeus on the other; but of all that is embraced under the 
biology of the latter half of the nineteenth century the world knew 
nothing. 



528 BUSINESS ADMINISTRATION 

Now, leaving this hasty and incomplete retrospect and coming 
down to 19 1 8, we find the contrast between today and 1818 perhaps 
most strikingly brought out, on the material side, if we consider the 
ability of man, in the early part of the nineteenth century, to meet the 
demands upon him in the matter of transportation of himself and his 
property. In 1800, he had hardly advanced beyond his ancestor of 
the earliest civilization; on the contrary, he was still dependent for 
transportation on land upon the muscular efforts of himself and 
domesticated animals, while at sea he had only the use of sails in 
addition. The first application of the steam engine with commercial 
success was made by Fulton when, in 1807, the steamboat " Clermont " 
made its famous trip on the Hudson River. Since then, step by step, 
transportation has been made more and more rapid, economical, and 
convenient, both on land and water. This has come first through 
the perfection of the steam engine, later through the agency of 
electricity, and still further and more universally by the use of gasolene 
motors. Finally, in these early years of the twentieth century, what 
seemed once a wild dream of the imagination has been realized, and 
man has gained the conquest of the air; while the perfection of the 
submarine is as wonderful as its work can be deadly. 

Hardly less marvelous is the practical annihilation of space and 
time in the electric transmission of human thought and speech by 
wire and by ether waves. While, still further, the same electrical 
current now gives man his artificial illumination and serves him in a 
thousand ways besides. 

But the limitations of space have also been conquered, during the 
same period, by the spectroscope which brings a knowledge of the 
material nature of the sun and the fixed stars and of their motion in 
the line of sight; while spectrum analysis has revealed the exist- 
ence of many new elements and opened up vistas as to the nature of 
matter. 

The chemist and the physicist, often working together in the 
investigation of the problems lying between their two departments, 
have accumulated a staggering array of new facts from which the 
principles of their sciences have been deduced. Many new elements 
have been discovered, in fact nearly all called for by the periodic law; 
the so-called fixed gases have been liquefied, and now air in liquid 
form is almost a plaything; the absolute zero has been nearly reached 
in the boiling point of helium; physical measurements in great pre- 
cision have been carried out in both directions for temperatures far 



THE ADMINISTRATION OF PRODUCTION 529 

beyond any scale that was early conceived possible; the atom, once 
supposed to be indivisible, has been shown to be made up of the 
much smaller electrons, while its disintegration in radium and its 
derivatives have been traced out and with consequences only as yet 
partly understood but certainly having far-reaching consequences; 
at one point we seem to be brought near to the transmutation of the 
elements which was so long the dream of the alchemist. Still again 
photography has been discovered and perfected and with the use of 
X-rays it gives a picture of the structure of bodies totally opaque to 
the eye; the same X-rays seem likely to locate and determine the 
atoms in the crystal. 

Here and at many other points we are reaching out to a knowledge 
of the ultimate nature of matter. 

In geology, vast progress has been made in the knowledge of the 
earth, not only as to its features now exhibited at or near the surface, 
but also as to its history in past ages, of the development of its struc- 
ture, the minute history of its life, the phenomena of its earthquakes, 
volcanoes, etc. Geological surveys in all civilized countries have 
been carried to a high degree of perfection. 

In biology, itself a word which though used by Lamarck did not 
come into use till taken up by Huxley, and then by Herbert Spencer in 
the middle of the century, the progress is no less remarkable. 

Although not falling within our sphere, it would be wrong, too, 
not to recognize also the growth of medicine, especially through the 
knowledge of bacteria and their functions, and of disease germs and 
the methods of combating them. The world can never forget the 
debt it owes to Pasteur and Lister and many later investigators in this 
field. 

More important and fundamental still than all the facts dis- 
covered and the phenomena investigated has been the establishment 
of certain broad scientific principles which have revolutionized modern 
thought and shown the relation between sciences seemingly independ- 
ent. The law of conservation of energy in the physical world and 
the principle of material and organic evolution may well be said to 
be the greatest generalizations of the human mind. Although sug- 
gestions in regard to them, particularly the latter, are to be found 
in the writings of early authors, the establishment and general accept- 
ance of these principles belong properly to the middle of the nineteenth 
century. They stand as the crowning achievement of the scientific 
thought of the period in which we are interested. 



530 



BUSINESS ADMINISTRATION 



It might even seem as if the limit of the unknown were being 
approached. There remains, however, this difference in the analogy, 
that in science the fundamental relations — as, for example, the nature 
of gravitation, of matter, of energy, of electricity; the actual nature 
and source of life — the solution of these and other similar problems 
still lies in the future. 



A GRAPHIC PRESENTATION OF THE HISTORY OF SCIENCE' 



1450 



1500 



CoMmLru.t 



1550 



Lnmria 



M 
N 
P 
R 
T 
W 
Y 
1450 



1600 

■Baan 



1650 



GaltUo 



AJ.nm.1 




woo 



M iv* r Ut^ J 

— '"• Zv "" Tii™ i. ._.;: 




1500 



1550 



1600 



1650 



1700 



1750 



18 00 



1850 



F 
G 
H 
J 

K 

L 

M 
M 
P 
R 
T 
W 
Y 

J900 



The lines in this chart show the life-periods of the great masters in the history 
of dynamics. The names are arranged alphabetically from top to bottom for 
convenient reference. This chart is typical of the appearance of a similar chart 
for any of the sciences and is interesting to us because it shows the dearth of 
workers in these fields in the sixteenth century and the great outburst of activity 
which took place with the beginning of the nineteenth century. 



2. WHAT CAN SCIENCE CONTRIBUTE IN THE FUTURE ? 

A. A HINT OF THE CONTRIBUTION OF PHYSICS 2 

The spirit of modern science is something relatively new in the 
world's history. That spirit has three elements. The first is a 
philosophy, the second is a method, and the third is a faith. Look 
first at the philosophy. I say that is new for the reason that all 
primitive peoples, and many that are not primitive, have held a 
philosophy that is both animistic and fatalistic. Every phenomenon 
which is at all unusual, or for any reason not immediately intelligible, 
used to be attributed to the direct action of some invisible personal 

1 Taken by permission from Carl Barus, "Historical Graphics," a letter to 
Science, XXX (1909), 372. 

2 Adapted by permission from R. A. Millikan, "Twentieth Century Physics," 
Smithsonian Report for igi8, pp. 169-84, and "A New Opportunity in Science," 
Science, N. S., Vol. L (1919), pp. 285-97. 



THE ADMINISTRATION OF PRODUCTION 531 

being. Witness the peopling of the woods and streams with spirits 
by the Greeks, the miracles and possession by demons of the Jews, 
the witchcraft manias of our own Puritan forefathers, only two or 
three hundred years ago. 

Now, the philosophy of physics, a philosophy which was held at 
first timidly, always tentatively, always as a mere working hypothesis, 
but yet held with ever-increasing conviction from the time of Galileo, 
when the experimental method may be said to have had its beginnings, 
clear up to the present time, is the exact antithesis of the above. 
Stated in its most sweeping form it holds that the universe is ulti- 
mately rationally intelligible, no matter how far from a complete 
comprehension of it we may now be, or indeed may ever come to be. 
It believes in the absolute uniformity of nature. It views the world as 
a mechanism, every part and every movement of which fits in some 
definite, invariable way, into the other parts and the other movements; 
and it sets itself the inspiring task of studying every phenomenon in 
the confident hope that the connections between it and other phe- 
nomena can ultimately be found. It will have naught of caprice in 
nature. It looks askance at mysticism in all its forms whether put 
forth by Dionysius in Greece in 300 B.C. or by the devotees of Bergson 
in Paris in 19 15. That is the spirit, the attitude, the working hypothe- 
sis of all modern science, and let me say that this philosophy is in no 
sense materialistic, because good, and mind, and soul, and moral 
values, which is only another word for God, these things are all here 
just as truly as are any physical objects, and with that kind of a 
creed they must simply be inside and not outside of this matchless 
mechanism. 

Second, as to the method of science, it is a method practically 
unknown to the ancient world, for that world was essentially sub- 
jective in all its thinking and built up its views of things largely by 
introspection. The scientific method, on the other hand, is a method 
which is completely objective. It is the method of the working 
hypothesis which is ready for the discard the very minute it fails to 
work. It is the method which believes in a minute, careful, wholly 
dispassionate analysis of a situation; and any physicist or engineer 
who allows the least trace of prejudice or preconception to enter into 
his study of a given problem violates the most sacred duty of his 
profession. 

It is the faith of the scientist, and it is a faith which he will tell 
you has been justified by works, that man is not a pawn in a game 



532 BUSINESS ADMINISTRATION 

played by higher powers; that his external, as well as his internal 
destiny is in his own hands. Take one illustration. In the mystical, 
fatalistic ages which preceded, electricity was simply the agent of 
inscrutable Providence; it was Elijah's fire from Heaven sent down 
to consume the enemies of Jehovah; or it was Jove's thunderbolt 
hurled by an angry God; and it was just as impious to study so 
direct a manifestation of God's power in the world as it would be 
for a child to study the strap with which he is being punished, or 
the mental attributes of the father who is behind the strap. It was 
only 150 years ago that Franklin sent up his famous kite, and showed 
that these thunderbolts were identical with the sparks which he 
could draw on a winter's night from his cat's back. Then, 30 years 
after that Volta found that he could manufacture these same thunder- 
bolts artificially by dipping dissimilar metals into an acid. And 30 
years farther along Oersted found that those same thunderbolts 
when tamed and running noiselessly along a wire would deflect a 
magnet, and with that discovery the electric battery was born, and 
the erstwhile blustering thunderbolts were set the inglorious task of 
ringing house bells, primarily for the convenience of womankind. 
Then 10 years later Faraday found that all he had to do to obtain a 
current was to move a wire across the pole of a magnet, and in that 
discovery the dynamo was born, and our modern electrical age, with 
its electric transmission of power, its electric lighting, its electric 
telephoning, electric toasting, electric foot warming, electric milk- 
ing — all that is an immediate and inevitable consequence of that 
discovery — a discovery which grew out of the faith of a few physicists 
that the most mysterious, most capricious, and the most terrible of 
natural phenomena is capable of a rational explanation and ultimately 
amenable to human control. 

In that statement I have revealed the taproot of the civilization 
of the nineteenth century. Add to it a bit to cover the harnessing 
of steam, and the development of the principle of the conservation 
of energy, and you have an epitome of the progress of the century 
just passed. It all grew out of the application of an extraordinarily 
small number of discoveries as to the way in which nature works. 

There is today a new opportunity in science for the young Ameri- 
can who is facing the problem as to where his life can be spent on the 
whole most effectively. It is to be assumed that most men are at 
bottom altruistic, that most men seek to direct their lives into channels 
in which they can make them most worth while for the race. I should 
like to divide all altruistic effort into three great classes: 



THE ADMINISTRATION OF PRODUCTION 533 

The first has to do with efforts toward the improvement of the 
individual characters and lives of men. This is the field which for 
thousands of years has been the chief concern of religion, and it is 
perhaps the most fundamental and most important of all. Its needs 
and its opportunities are eternal, and no thinking man leaves it out 
of account. But it is not this field to which I am directing attention 
today. 

The second type of effort has to do, in one form or another, with 
possible and projected changes in the distribution of wealth. In this 
category are found all efforts toward social rearrangements, and 
educational reform, brought about either by legal enactment, or by 
the development of an enlightened public opinion. No man in his 
senses would belittle this type of effort. The needs are tremendous 
and every right thinking man bids every worker of this sort god- 
speed. 

But it may after all be questioned whether effort in this field has 
as good a chance — I had almost said one-tenth as good a chance — of 
effectiveness in contributing to human well-being as has effort in 
the third field, namely, the field which has to do broadly with the 
creation of wealth rather than with its distribution. This last is 
the field of scientific and engineering endeavor; for the scientist is, in 
the broad sense, a creator of wealth as truly as is the man whose 
attention is focused on the application of science. Indeed, the 
scientist is merely the scout, the explorer, who is sent on ahead to 
discover and open up new leads to nature's gold. His motive may 
be merely to find out how nature works, but once that knowledge 
has been gained, man almost always finds a way to apply it to his 
own ends, so that in a very real sense all scientific effort is directed 
toward the improvement of human well-being through the creation of 
more wealth. 

B. A HINT OF THE CONTRIBUTION OF BOTANY 1 

In the war period we faced what may be called "emergency" 
problems. This means that there was no time for prolonged research; 
in fact, what was demanded was available information rather than 
research. A few illustrations will be given chiefly to illustrate the 
nature of the needs that developed. All branches of botany were 
called upon to answer questions, and the committee really acted as a 
clearing house of information. The emergency problems may be put 

1 Adapted by permission from J. M. Coulter, "Report of the Work of the 
National Research Council." School Science and Mathematics, XXI (1921), 613-17. 



534 BUSINESS ADMINISTRATION 

under three general heads and were cared for by three different 
groups. 

The first category was food, and numerous questions presented 
themselves. This food problem may be considered under three 
heads. The first is food production. Some of the problems already 
started had a bearing upon this, but had not progressed far enough 
to be productive. There was a great deal of information available 
relating to food production, but it was isolated and had never been 
brought together and focused upon the problem. For example, 
one of the important things was the problem of adjustment. People 
everywhere were trying to grow the same crops, in spite of varying 
conditions. One of the problems was to adjust the proper crop to the 
locality and. soil in order to secure maximum returns. Another 
problem was the substitution of well known drought-resistant and 
disease-resistant races for those that are not resistant. There was a 
great deal of scattered information upon these subjects, but it had 
to be brought together and made available. Another problem was 
that of soil management, chiefly a question of fertilizers. 

Another phase of the food problem was food conservation. I do 
not mean conservation in the ordinary sense in which it was used 
during the war. It was the kind of conservation that started the 
disease-resistant surveys in the effort to conserve our crops from 
destruction. The start in this phase of the work was made by that 
group of botanists known as pathologists. There came in also 
another feature, the co-operation with the Bureau of Markets. 
Thorough studies were made of the marketing of products, and 
everything — from picking and packing to the final distribution— was 
considered. 

The third and very interesting phase of the food problem came 
under the head of vitamines, a subject that is coming to the front. 
It was known that the vitamine content of food was very important 
not on account of what is called food value, but on account of enabling 
one to use food with the greatest efficiency. It is vitamines that may 
be said to give a man "pep," and the question was raised in connection 
with the army ration. The problem was to discover a food with the 
greatest vitamine content that was capable of transportation and 
could stand storage. There are certain perishable products rich in 
vitamines, as liver, lettuce, milk, etc., but of course such products 
could not be transported in an army ration. A specialist in vitamines 
undertook the work, and found the greatest vitamine content in 



THE ADMINISTRATION OF PRODUCTION 535 

peanuts; but the problem was that when peanuts are roasted the 
vitamines are reduced. Before the peanut was advised as a part of 
the army ration, however, the investigator found a wonderful vitamine 
content in the soy bean, and this became a conspicuous part of the 
army ration. 

The second general category of problems was timber. The 
first question asked was in reference to the most desirable timber for 
the manufacture of airplanes. The ordinary timber used for that 
purpose is spruce, but there was some question as to whether it would 
not be necessary to provide ourselves with some other kind that might 
be used when spruce was no longer available. It was a question of 
fiber, lightness, and elasticity. Some suitable timbers were found, 
and in connection with working upon them, the pathologists dis- 
covered an interesting situation. A disease might have started in the 
timber in such an inconspicuous way that an ordinary inspector would 
not detect it. If the timber were put in use the disease would spread, 
and sooner or later the airplane constructed from it would collapse. 
Many accidents in the early part of the war seemed to have been due 
to the fact that these little specks of diseased tissue had not been 
recognized when the timber was prepared. 

The committee was asked also to recommend timbers for various 
other structures in connection with the war, particularly in connection 
with the various camps in this country. 

The third general category was raw products. Few people realize 
the number of raw products obtained from plants for various uses, 
such as gums, oils, resins, fibers, etc. The bulk of these raw products 
had been imported from various parts of the world, chiefly Europe, 
and of course this source of supply was cut off. It was necessary 
to discover new geographical sources or new plant sources. A few 
illustrations will indicate where the pressure was felt. A substitute 
for red dyes was needed, and in a comparatively short time two or' 
three common plants were found that yielded a red dye that did 
fairly well as a substitute. The rubber supply offered another problem. 
The work had been started even before the war in connection with a 
Mexican rubber plant, for the Brazilian forests were no longer yielding 
enough. A substitute equal to the Brazilian rubber was not found, 
but certain substitutes were made available for supplementing the 
rubber supply. A number of important drugs were called for which 
are obtained from plants, the supply of which had been cut off, and a 
number of these were secured. 



536 BUSINESS ADMINISTRATION 

3. TECHNICAL EDUCATION 1 

Engineering schools, schools of applied science, institutes of 
technology — such schools naturally did not appear until the physical 
sciences obtained a considerable development, and their application 
to the arts and industries became general. In Europe, where these 
institutions first came into being, they have often evolved from simple 
beginnings through successive adaptations to the changing state of 
scientific knowledge and engineering practice. The earliest schools 
appeared in France and Germany. 

In France the Ecole des Ponts et Chaussees, opened in 1747 as a 
draughting school, was reorganized in 1760 for the training of engineers 
for the government service. In 1794, the Ecole Poly technique was 
founded to fit men for the engineer and artillery service of the French 
army. The standards of this school have always been of the highest, 
and some of the most prominent engineers in private practice, as 
well as in the government service, have received their training in its 
classes. In 1829 the Ecole Central e was founded as a private institu- 
tion, and has continued to be independent of government aid up to the 
present time. In this institution a majority of the French engineers 
not employed in the government service have been educated. A 
number of high-grade technical schools partly supported by the 
government exist in important centres outside of Paris, such as the 
Ecole Centrale at Lyons, Ecole des Mineurs at St. Etienne, and 
the Institut du Nord at Lille. 

In Germany, the beginning of the first technical high schools (as 
the higher technical schools are now called) was made in Berlin in 
1799, in the establishment of an academy for builders (Bau-Akademie). 
In 182 1 a trade school (Gewerbeschule) was also organized; and by 
the union of these two in 1879 was created the present technical high 
school. By 1835 a number of other trade and technical sch6ols, with 
little uniformity of organization, were established at different places. 
These schools could only exact low entrance requirements and perform 
comparatively elementary work, as no schools existed in which a 
sound preparation in science could be obtained. After the incorpora- 
tion of the real or scientific school in the German system, the standards 
of certain of these early technical schools were gradually advanced, 
and the principle of specialization was introduced; until after a 
century of development a series of technical schools has evolved taking 

1 Adapted by permission from Nelson's Perpetual Loose-Leaf Encyclopaedia, 
XI, 641-42. (Thomas Nelson and Sons, 1920.) 



THE ADMINISTRATION OF PRODUCTION 537 

equal rank with university departments and requiring equal prepara- 
tion for admission. Today, Germany possesses nine of these splendid 
institutions — located at Aix la Chapelle, Berlin, Brunswick, Darm- 
stadt, Dresden, Hanover, Karlsruhe, Munich, and Stuttgart — in 
which the most advanced instruction in engineering, architecture, 
industrial chemistry, and agriculture is presented. 

It is safe to say that the influence of these schools, together with 
university instruction in pure science, has been one of the strongest 
single factors in the remarkable industrial development which has 
been going on in Germany since the middle of the last century, and 
which has brought her to the front rank among the commercial 
nations of the world. 

In the United States, the institute of technology has received far 
more attention and attained a much larger development than any 
other form of technical or industrial school. This development has 
resulted in a type of institution equal in practical value to the most 
advanced schools of European countries. 

The Rensselaer Polytechnic Institute, the first of such schools 
established, was founded in 1824 at Troy, N.Y., by Stephen Van 
Rensselaer, the last of the patroons, as a school of applied science. 
This institution soon took the form of a school of civil engineering, in 
which field it has retained a foremost rank to the present time, and its 
long list of graduates includes many of the most prominent and suc- 
cessful workers in this profession. 

The Rensselaer Institute remained the only example of a school of 
applied science until nearly the middle of the century, when, in response 
to the growing demand for scientific instruction, the Sheffield Scientific 
School (1847) and the Lawrence Scientific School (1848) were founded 
in connection respectively with Yale and Harvard Universities. 
The instruction in these schools was at first in pure rather than applied 
science; but later, courses of a true engineering type were developed. 
It was the period of the Civil War, and the years immediately following, 
however, that witnessed a general movement toward the establishment 
of schools of technology. The energy turned back at this time into 
industrial life, the increased knowledge of the country's resources, 
and the growth of railroads all tended to set in motion a powerful 
current of industrial expansion. Technical training was needed to 
fit men to cope with the new problems presented. In 1861, through 
the efforts of William Barton Rogers, the charter of the Massachusetts 
Institute of Technology was granted, and in 1865 the first classes were 
organized. 



53§ BUSINESS ADMINISTRATION 

The Worcester Polytechnic Institute was founded by John Boyn- 
ton, a successful Massachusetts merchant, in 1864, and was opened in 
1867. Shop work has been one of the prominent features of the 
educational work of this institution since its foundation. In 1864 
the School of Mines of Columbia University was created, out of which 
have grown the several schools under the faculty of Applied Science 
in that institution. In 1865 Lehigh University was founded by the 
Hon. Asa Packer of Mauch Chunk, and in 1866 courses in several 
branches of engineering were organized. In 187 1 the Stevens Institute 
of Technology opened its classes. The Sibley College of Mechanical 
Engineering and the Mechanic Arts was organized at Cornell Uni- 
versity in 1872, and other courses in engineering were soon added. 

In the next twenty years a large number of schools of advanced 
rank were founded either as separate institutions or departments of 
universities. The earlier schools were mainly on private foundations, 
but the passage of the Morrill Act by Congress in 1862, under which 
large land grants were made to the States for the support of instruction 
in the agricultural and mechanical arts, resulted shortly in the 
inclusion of engineering departments in most of the Western State 
colleges and universities. 

Among those of the first group are Purdue University, Lafayette, 
Ind.; the Rose Polytechnic, Terre Haute, Ind.; the Case School of 
Applied Science, Cleveland, Ohio; the University of Pennsylvania; 
Washington University, St. Louis, Mo.; and the Leland Stanford 
Junior University of California. Of later establishments are the 
Armour Institute of Chicago and the Carnegie Technical Schools of 
Pittsburgh. 

Prominent state institutions are the Ohio State University, 
Michigan College of Mines, the Universities of Illinois, Michigan, 
Minnesota, Missouri, Nebraska, Wisconsin, and California, Pennsyl- 
vania State College, and the Iowa State College of Agriculture and 
Mechanical Arts. 

According to the report of the U.S. Commissioner of Education for 
1910, there were 129 universities, colleges, or schools of technology 
in the United States giving courses in engineering. There was 
reported a total of 30,337 students engaged in engineering studies, 
among which were the following: architecture, 775; civil engineer- 
ing, 7,889; chemical engineering, 869; electrical engineering, 5,450; 
mechanical engineering, 6,377; mining engineering, 2,656; forestry, 
546; chemistry, 4,807. In addition to these there were 11,163 stu- 
dents reported as engaged in general science study. 



THE ADMINISTRATION OF PRODUCTION 539 

4. THE ENGINEERING PROFESSION 1 

If the writer may modestly put forward a suggestion for a defini- 
tion, he would word it: "The Engineer is he who by science and by 
art so adapts and applies the physical properties of matter and so con- 
trols and directs the forces which act through them as to serve the 
use and convenience of man, and to advance his economic and ma- 
terial welfare." 

In making the following classification of engineers it is obvious that 
agreement cannot be secured from all as respects the number of 
branches to be recognized. With this apology and for the purpose 
in hand there are at least thirteen: 

a) The mining engineer and his close ally, the metallurgical 
engineer, are concerned with the discovery and the winning and 
extraction from the earth of its buried treasures of oil, fuel, and rock. 
He touches the geologist and mineralogist on one side of his functions, 
and the chemist upon the other. Midway he allies himself to the 
mechanical engineer for the power to overcome his resistances and to 
the electrical engineer for its convenient transmission to the working 
point. If he concentrates his ore after winning it from the earth he 
calls again for his machinery upon the mechanical engineer. The 
metallurgical engineer who transforms the crude ore into marketable 
metal or into the merchant form or structural shape is allied to the 
chemist upon the one side for his processes, and to the mechanical 
engineer upon the other for his machinery. The electrical engineer is 
more and more furnishing him the energy for conversion by heat 
through electrical channels, the mechanical engineer furnishing the 
latter his power. The mining engineer may be both miner and 
metallurgist. The iron and steel metallurgist is usually a mechanical 
engineer. 

b) The electrical engineer is primarily entrusted with the trans- 
formation of mechanical or chemical energy into electric form, and 
its transmission in that form to the point of use, where it will be 
again converted into some other shape. The electrical engineer has 
made his own the question generating such electric energy for the 
solution of the problems of lighting, transportation of passengers by 
railway, and communication by telegraph and telephone. He touches 
the physicist in the realm outside his applications of science, and has 
the mechanical or hydraulic engineer next to him to supply mechanical 

1 Adapted by permission from F. R. Hutton, "The Mechanical Engineer and 
the Function of the Engineering Society," Proceedings of the American Society of 
Mechanical Engineers, XXIX (1907), 602-13. 



540 BUSINESS ADMINISTRATION 

energy to his generator, and the mechanical engineer beyond him, 
where his energy drives the tool, or operates the pump or the elevator. 
Where his energy is made to appear as high heat, he serves the metal- 
lurgist, the chemical engineer; where it appears as low heat or as 
light, he serves the individual members of the community directly, 
as he does in the problem of communicating speech. His field is 
very definite. 

c) The naval engineer and marine architect is a specialized 
mechanical and structural engineer. His hull is a truss unsymmetri- 
cally loaded and variably supported: his motive power a definite 
yet widely diversified problem. He covers in addition a wide range 
of special problems when his vessel is also a clubhouse or hotel, on the 
one hand, or a powerful fighting machine upon the other. 

d) The military engineer must cover both the defensive and the 
offensive department of his avocation. On the one side he is a 
structural engineer, and the problems of effective transportation 
enter his field, which he therefore shares with what is usually called 
the civil engineer. On the side of attack, the problems of ordnance 
both for its construction and for its operation take him into the field 
of the mechanical engineer and electrical engineer, and his problems 
touch those of the physicist and the chemist and the mathematician 
on the research and theoretical side. 

e) The chemical engineer is a new applicant at the door of profes- 
sional recognition in certain quarters. He is the engineer in charge 
of production or manufacture where the process or the product, or 
both, are chiefly or entirely dependent upon the theories and practice 
of chemistry. He shares his field with the metallurgical engineer as 
respects the manufacture of metals; he is a mechanical engineer as 
soon as the plant becomes large enough to warrant the application 
of power and machinery to the mechanical handling of his product. 
Gas-plants, sugar and oil refineries, and the straight chemical manu- 
facturing corporations call for such a man, whatever his designation. 
It would appear, however, that the normal tendency of growth and 
development in this field will be toward the utilization of two types of 
man. The one will be the chemist and the scientist; the other will 
be the mechanical engineer and executive. 

/) The sanitary engineer is a specialist in hydraulic engineering 
in the applications of water supply and drainage as means to secure 
the well-being of the community as respects its public health. His 
co-workers are the bacteriologist and the physician. It would seem 



THE ADMINISTRATION OF PRODUCTION 541 

more serviceable, however, for the purpose in hand to group such 
men with what are hereafter to be called the civil engineers. 

g) The heating and ventilating engineers, making a specialty of the 
sanitary requirements of enclosed houses as respects their fresh and 
tempered air supply, are really sanitary engineers, having, however, 
an outlook and a relation to mechanical engineering in the appliances 
of their function rather than toward civil engineering. 

h) The refrigerating engineer is concerned with the transformation 
of mechanical or heat energy so as to lower the amount of such intrinsic 
energy in any material or space. He is most unassailably a mechanical 
engineer. 

i) The hydraulic engineer is of two groups. The one type, con- 
cerned with the problems of the river or canal for navigation or for 
power with the dam and its accompanying details of waterways and 
controlling gatehouses and sluices; and with the gravity storage 
and distribution by mains of the city water supply has plainly his 
outlook toward civil engineering. The other type, concerned with the 
water motor and its attached machinery for its operation, with the 
mechanical handling of water for city use or 'for power in industry, 
the designer of pumps and hydraulic utilization machinery, has his 
outlook equally definite upon the field of the mechanical engineer. 
The future is likely to see this differentiation emphasized, the one 
class calling himself a civil and hydraulic engineer, and the other 
class a mechanical and hydraulic engineer. 

j) The gas engineer has two sets of problems: The one is the 
intra-mural manufacture and storage of his product, where his 
functions are those of the chemical manufacturer, and he should be 
both chemical and mechanical engineer; the other is the distribution 
problem for whose solution is required the skill and knowledge of a, 
type which is unnamed, but which, logically in parallel with the 
hydraulic engineer above, should be called the pneumatic (or gas) 
engineer. 

k) There is no recognized group of engineers of transportation, or 
transportation engineers. Such a group obviously exists, however, 
whether or not the name is attached to an organization inclusive of 
all, or is in general use. Such are the engineers of motive power on the 
steam railways, with the master mechanics and the signal engineers 
and the operative class on locomotives; such are the street railway 
engineers; the car builders; the maintenance-of-way engineers, the 
bridge engineers, the engineers of floating equipment. From the 



542 BUSINESS ADMINISTRATION 

bottom of the rail upward, these have their outlook on mechanical 
or electrical engineering; from the bottom of the rail downward, 
upon civil engineering. 

/) The foregoing group does not claim to be exhaustive nor 
inclusive of all subdivisions of engineers even so far as it has gone. 
The current activities of the Engineering Building reveal bodies of 
municipal engineers, of illuminating engineers, of engineers concerned 
in fire protection, and many others. But the purpose has been to 
clear the way for the separation of the two most closely allied in 
function and service, the civil and the mechanical engineer. The 
civil engineer is confessedly differentiated from the electrical and from 
the mining engineer: he has been more and more utilizing the achieve- 
ments of the mechanical engineer, or the latter has been invading the 
former field of the civil engineer. 

It is plain that to the civil engineer belong as of right all problems 
relating to the canal, the lock, the river, the harbor, the dock, the 
sea-wall, the break-water, the highway, the aqueduct, the bridge, the 
viaduct, the retaining wall, the permanent way of the railway below 
the foot of the rail. He also has nearly the whole of the municipal 
problem in streets, sewage, distribution of water; the location of 
railways, with geodetic and other surveying, are his. He has the 
foundation of structures in any event, but may have to share the 
roof and the skeleton steel frame with other specializations. Tunneling 
i s usually done by civil engineers, although it was originally a mining 
engineer's prerogative. 

m) To the mechanical engineer, on the other hand, belong as 
undoubtedly, and as of right, the problems of the generation of 
power in power houses and power plants, and its transmission to the 
operative point unless this latter is done by electric means. It is also 
plain that to the mechanical engineer belong all design, creation, and 
manufacture of tools and machinery. This makes him therefore the 
natural administrator or executive of the production processes involv- 
ing the use of machinery in factories and mills, and it is here that he 
finds his broadest scope and widest opportunity, as will be further 
demonstrated hereafter. As creator of machinery, he will be a drafts- 
man or designer of a producing plant; as operator of the plant con- 
sidered as a tool for production, he will be a general manager or 
superintendent, or will perform these functions as owner or as presi- 
dent, vice-president, agent, secretary, or treasurer. As a producer of 
power, the railway will make the mechanical engineer their superin- 



THE ADMINISTRATION OF PRODUCTION 543 

tendent of motive power, and the rail and joint become also responsi- 
bilities of his; as administrator of men and machinery, he becomes 
master mechanic of the railway, and more and more such engineers 
are chosen to be general superintendents. The automobile or motor 
vehicle engineer is of course a mechanical engineer. From his knowl- 
edge and special training he becomes the inspector and tester for all 
departments of mechanical production. 

5. SOME CONSEQUENCES OF TECHNOLOGICAL 

INDUSTRY 

A. THE TRANSFER OF THOUGHT, SKILL, AND INTELLIGENCE 

I 1 

Suppose it be desired to drill four holes in a number of plates, so 
that they bear a certain fixed relation to the edges of the plate; and 
suppose the operator to be equipped with the ordinary drilling 
machine which guides the drill so that it pierces the plate squarely. 
To drill these holes in one plate, with any degree of accuracy, requires 
a high degree of skill on the part of the operator; and to drill any 
number of such plates so that the spacing of the holes in them will 
correspond closely with those in the first plate requires* a very high 
degree of manual skill, considerable time per plate, and is a very 
costly operation. 

Suppose, however, a skilled workman makes a so-called " drilling 
jig" in which the plate can be securely clamped by set screws and in 
which all the plates can in turn be clamped in exactly the same posi- 
tion. The plate contains four holes, which have been very carefully 
located to correspond with the required location of the holes. 

Now it is evident that almost any unskilled person can drill the 
plate, when so held, as accurately as the most skilled workman can 
without it. Further, he cannot drill the plate inaccurately. True, he 
must have a slight amount of training in handling the drilling machine, 
but this is small and soon acquired. The accuracy of the work no longer 
depends on the skill of the operator but on the accuracy of his tools. 

This principle, illustrated above, has been aptly called "The 
Transfer of Skill," and it is to be especially noted that this principle 
has nothing to do with division of labor, though, as can be seen, it 
allows an extension of the same. Nor is the principle inherently 

1 Adapted by permission from D. S. Kimball, Principles of Industrial Organi- 
zation, pp. 10-13. (McGraw-Hill Book Company, 1913.) 



544 BUSINESS ADMINISTRATION 

applicable to machines alone; it can be and is applied to hand methods. 
True, most machines are constructed with this end in view, the drilling 
machine mentioned above, for instance, having this characteristic 
in so far as guiding the drill vertically is concerned. 

It is evident that for a given operation the more skill that is trans- 
ferred to the machine the less is required in the operator. When 
nearly all the skill has been so transferred, but the machine still 
requires an attendant, it is called a semi-automatic machine. Turret 
lathes are excellent examples of this class of machinery. 

In drilling the plate without the jig the skilled mechanic must 
expend thought as well as skill in properly locating the holes. The 
unskilled operator need expend no thought regarding the location 
of the holes. That part of the mental labor has been done once for 
all by the toolmaker. It appears, therefore, that a transfer of thought 
or intelligence can also be made from a person to a machine. If the 
quantity of parts to be made is sufficiently large to justify the expendi- 
ture, it is possible to make machines to which all the required skill and 
thought have been transferred and the machine does not require 
even an attendant. Such machines are known as full automatic 
machines. Automatic screw machines are excellent examples of a 
complete transfer of skill and thought. Care should be taken to dis- 
tinguish clearly between transmission of intelligence, as illustrated in 
drawings, specifications, and written or spoken communications in 
general, between men and the transfer of intelligence or thought from 
a skilled man to a machine. These principles, transfer of skill and 
transfer of thought, lie at the bottom of modern industrial methods. 
Under former and simpler methods of manufacture the machine was 
an aid to the worker's skill, the amount of skill that had been trans- 
ferred being very small. In the new machines the transfer of skill 
and thought may be so great that little or none of these are required 
of the attendant worker. 

II 1 

Modern industry is stated by some writers to have begun in 1738 

when John Wyatt brought out a spinning machine. Others place 

the period as between 1750 and 1800, when the power loom and steam 

engine came into being. It was marked by the development of 

labor-saving machinery. It was brought about by the change from 

handicraft to manufacture. 

1 Adapted by permission from the Majority Report of the Sub-Committee on 
Administration of the American Society of Mechanical Engineers, 1912. 



THE ADMINISTRATION OF PRODUCTION 545 

Early British economists held that the application of the principle 
of division of labor was the basis of manufacture. From Adam 
Smith's Wealth of Nations, 1776, we quote: 

This great increase of the quantity of work which, in consequence of 
the division of labor, the same number of people are capable of performing, 
is owing to three different circumstances: first, to the increase of dexterity 
in every particular workman; secondly, to the saving of the time which is 
commonly lost in passing from one species of work to another; and lastly, 
to the invention of a great number of machines which facilitate and abridge 
labor, and enable one man to do the work of many. 

Charles Babbage, the great British mathematician and mechani- 
cian, believed that from the above-quoted statement the most impor- 
tant principle was omitted. This omission he supplied as follows in 
his Economy of Machinery and Manufacture, 1832. 

That the master manufacturer, by dividing the work to be executed 
into different processes, each requiring different degrees of skill and force, 
can purchase exactly that precise quantity of both which is necessary for 
each process; whereas, if the whole work were executed by one work- 
man, that person must possess sufficient skill to perform the most difficult, 
and sufficient strength to execute the most laborious, of the operations 
into which the art is divided. 

It appears, however, that another principle is the basic one in 
the rise of industry. It is the transference of skill. The transference 
of skill from the inventor or designer to the power-driven mechanism 
brought about the industrial revolution from handicraft to manu- 
facture. After the traditional skill of a trade, or the special, peculiar 
skill of a designer or inventor, has been transferred to a machine, 
an operator with little or no previously acquired skill can learn to 
handle it and turn off the product. 

Methods of analyzing and recording operations were early devel- 
oped. Adam Smith records the divisions of the work of manu- 
facturing pins, listing eleven operations. Charles Babbage gives a 
table from a French investigator, showing the number of operations, 
time for each, cost of each, and expense of tools and material for 
making pins in France in 1760. He gives a similar table for English 
manufacture in his day. 

Thus we see the application of the principle of transfe-ence of skill 
at the basis of the development of the industry and an early apprecia- 
tion of the value of the detailed study of operations in making that 
transference more complete. But the machine was the viewpoint. 



546 BUSINESS ADMINISTRATION 

It was looked upon as the producing unit. Combined and contrasted 
with this was a lack of knowledge of scientific principles and their 
sure application. Charles Babbage treats of this forcefully. We 
quote: 

There is perhaps no trade or profession existing in which there is so 
much quackery, so much ignorance of the scientific principles, and of the 
history of their own art, with respect to its resources and extent, as is to be 
met with amongst mechanical projectors. 

In the same vein he emphasizes the need of accurate drawings as 
if having in mind the poor quality of the work from the average 
draftsman of his day. He further points out that there is another 
important factor in successful industry, in addition to machinery. 
We read that "in order to succeed in a manufacture, it is necessary not 
merely to possess good machinery, but that the domestic economy of 
the factor should be most carefully regulated. " 

These quotations foreshadow modern methods of thinking out 
the work in advance and transferring this thought to the workmen. 
But from the period of the last quotation almost to the present there 
has been no change in the basic principles discovered and applied in 
industry. There has been nothing but an extension of those already 
known. The place of greatest advance has been in the drawing 
room. The art of machine design has been greatly developed. The 
last half of the last century saw a tremendous increase in inventions, a 
tremendous furtherance of the application of transference of skill to 
machines and tools. The skeleton of an industrial organization of this 
period, one that was too large for a single executive to manage, con- 
sisted of a designing department and a production department, each 
with a head responsible to the manager. 

The first of these, the one that was the means of embodying skill 
in the machinery and tools of production, was highly developed and 
organized. Experiment, research, and detailed study were constantly 
resorted to, to aid in reaching the desired result. The work was highly 
specialized and the employees highly paid. Not infrequently the 
manager or chief executive devoted much of his own time to this 
part of the business. 

The production department presented a contrasting condition. 
The workmen were given the tools and machines designed to the 
drawing room and using their own unaided skill were expected to 
produce work of the desired quality and quantity. Except in rare 
instances no effort was made to transfer the skill of the management 



THE ADMINISTRATION OF PRODUCTION 547 

to the production department and the employees, or to undertake the 
division of executive thought. Very little consideration was given 
to the workmen as a producing unit. 

Within the past twenty or twenty-five years certain changes have 
taken place in the attitude of many production managers toward the 
problems that they face and the forces and means that they control. 
An increasing amount of attention is being given to the worker. But 
the most important change, and one that comprehends the others, is 
in the mental attitude toward the problems of production. The 
tendency is toward an attitude of questioning, or research, of careful 
investigation of everything affecting the problems in hand, of seeking 
for exact knowledge and then shaping action on the discovered facts. 
It has developed the use of time study and motion study as instru- 
ments for investigation, the planning department as an agency to 
put into practice the conclusions drawn from the results of research, 
and methods of wage payment which stimulate co-operation. 

All of these changes have affected the production department 
much more than the designing department. The effect is to extend 
the principle of transference of skill to production, so that it com- 
pletely embraces every activity in manufacture. The skill of the 
management is consciously transferred to all of the operations of the 
factory. This extension is expressed by these phrases: the drawing 
room is the planning department of design, and the planning depart- 
ment is the drawing room of production. 

We conceive the prominent element in present-day industrial 
management to be the menial attitude that consciously applies the 
transference of skill to all the activities of industry. 

B. THE INTELLECTUAL EFFECTS OE MACHINERY 1 

The question of the net intellectual effects of machinery is not one 
which admits of positive answer. It would be open to one to admit 
that the operatives were growing more intellectual and that their 
contact with machinery exercises certain educative influences, but 
to deny that the direct results of machinery upon the workers were 
favorable to a wide cultivation of intellectual powers, as compared 
with various forms of freer and less specialized manual labor. The 
intellectualization of the town operatives (assuming the process to 
be taking place) may be attributable to the thousand and one other 

1 Adapted by permission from J. A. Hobson, "The Influence of Machinery," 
Political Science Quarterly, VIII (1893), 111-23. 



548 BUSINESS ADMINISTRATION 

influences of town life rather than to machinery, save indirectly so 
far as the modern industrial center is itself the creation of machinery. 
It is not, I think, possible at present to offer any clear or definite 
judgment. But the following distinctions seem to have some weight 
in forming our opinion. 

The growth of machinery has acted as an enormous stimulus to 
the study of natural laws. A larger and larger proportion of human 
effort is absorbed in processes of invention, in the manipulation of 
commerce on an increasing scale of magnitude and complexity, and 
in such management of machinery and men as requires and educates 
high intellectual faculties of observation, judgment, and speculative 
imagination. Of that portion of workers who may be said, within 
limits, to control machinery, there can be no question that the total 
effect of machinery has been highly educative. Some measure of 
these educative influences descends even to the "hand" who tends 
some minute portion of machinery. 

So also allowance should be made for the skilled work of making 
and repairing machinery. The engineer's shop is becoming every 
year a more and more important factor in the equipment of a factory 
or mill. But though "breakdowns" are essentially erratic and must 
always afford scope for ingenuity in their repair, even in the engineer's 
shop there is the same tendency for machinery to undertake all 
work of repair which can be brought under routine. 

Finally it should be borne in mind that in several large industries 
where machinery fills a prominent place the bulk of the labor is not 
directly governed by the machine. This fact has already achieved 
attention in relation to railway workers. The character of the 
machine certainly impresses itself upon these in different degrees, but 
in most cases there is a large amount of detailed freedom of action 
and scope for individual skill and activity. 

Making allowance, then, for the intelligence and skill used in the 
invention, application, management, and repair of machinery, what 
are we to say of the labor of him who, under the minute subdivision 
enforced by machinery, is obliged to spend his working life in tending 
some small portion of a single machine, the whole work of which is to 
push some single commodity a single step along the journey from 
raw material to consumptive good ? 

His work, it is urged, calls for "judgment and carefulness." So 
did his work in manual labor before the machine took it over. His 
"judgment and carefulness" are now confined within narrower limits 



THE ADMINISTRATION OF PRODUCTION 549 

than before. The responsibility of the individual worker is greater, 
precisely because it is narrowed down so as to be related to and 
dependent on a number of other operatives in other parts of the same 
machine with whom he has no direct personal concern. Such realized 
responsibility is an element in education, moral and intellectual. 
But this responsibility is a direct result of the minute subdivision. 
It is, I think, questionable whether the vast majority of machine 
workers get any considerable education from the fact that the machine 
in conjunction with which they work represents a huge embodiment 
of the delicate skill and invention of many thousands of active minds, 
though some value may be accorded to Mr. Cooke Taylor's con- 
tention that "the mere exhibition of the skill displayed and the 
magnitude of the operations performed in factories can scarcely fail 
of some educational effect." 

The work of tending machinery is not of course to be regarded 
as absolutely automatic. To a certain limited extent the "tender" 
of machinery rules as well as serves the machine: in seeing that his 
portion of the machine works in accurate adjustment to the rest, the 
qualities of care, judgment, and responsibility are evoked. A great 
part of modern inventiveness, however, is engaged in devising auto- 
matic checks and indicators for the sake of dispensing with human 
skill and reducing the spontaneous or thoughtful elements of tending 
machinery to a minimum. 

So far as the man follows the machine and has his work determined 
for him by mechanical necessity, the educative pressure of the latter 
force must be predominant. Machinery like everything else can only 
teach what it practices. Order, exactitude, persistence, conformity 
to unbending law — these are the lessons which must emanate from 
the machine. They have an important place as elements in the forma- 
tion of intellectual and moral character. But of themselves they 
contribute a one-sided and very imperfect education. Machinery 
can exactly reproduce; it can, therefore, teach the lesson of the exact 
reproduction, an education of quantitative measurements. The 
defect of machinery, from the educative point of view, is its absolute 
conservatism. The law of machinery is a law of statical order, 
that everything conforms to a pattern, that present actions precisely 
resemble past and future actions. Now the law of human life is 
dynamic, requiring order, not as valuable in itself, but as the condition 
of progress. The law of human life is that no experience, no thought, 
or feeling is an exact copy of any other. Therefore, if you confine 



550 BUSINESS ADMINISTRATION 

a man to expending his energy in trying to conform exactly to the 
movements of a machine, you teach him to abrogate the very principle 
of life. Variety is the very essence of life and machinery is the enemy 
of variety. This is no argument against the educative uses of 
machinery, but only against the exaggerations of these uses. If a 
workman expend a reasonable portion of his energy in following the 
movements of a machine, he may gain a considerable educational 
value; but he must also have both time and energy left to cultivate 
the spontaneous and progressive arts of life. 

It is often urged that the tendency of machinery is not merely 
to render monotonous the activity of the individual worker, but to 
reduce the individual differences in workers. This criticism finds 
expression in the saying: "All men are equal before the machines." 
So far as machinery actually shifts upon natural forces work which 
otherwise would tax the muscular energy, it undoubtedly tends to put 
upon a level workers of different muscular capacity. Moreover, 
by taking over work which requires great precision of movement, there 
is a sense in which it is true that machinery tends to reduce the 
workers to a common level of skill, or even of un-skill. 

But this is by no means all that is signified by the "equality of 
workers before the machine." It is the adaptability of the machine 
to the weaker muscles and intelligence of women and children that is 
perhaps the most important factor. The machine in its development 
tends to give less and less prominence to muscle and high individual 
skill in the mass of workers, more and more to certain qualities of 
body and mind which not only differ less widely in different men, 
but in which women and children are more nearly on a level with men. 

C. TECHNOLOGICAL INDUSTRY IS COMPLEX INDUSTRY 

Industry that is dependent upon modern technology is very 
different from the tool industry of medieval times. 

i. Capital is not as mobile as in the medieval period. The 
railroad industry furnishes an extreme illustration of this fact. 
This industry is pre-eminently an industry of much fixed, specialized 
capital. Tracks, locomotives, cars, etc., require tremendous outlay, 
and when these instruments have been called into being they can be 
used only for the one purpose. Social capital has been committed 
to the enterprise in a way that is irrevocable. In both the railway 
and in other businesses not merely fixed capital but the expensive and 
intricate organization, both industrial and commercial, make changes 



THE ADMINISTRATION OF PRODUCTION 551 

difficult unless one is willing to incur heavy costs. Under the regime 
of simple industry, processes were simple and little capital was 
required for any new business venture. If the venture proved 
unsuccessful, the enterpriser could shift fairly readily to some other 
line of activity. His loss of capital in the old enterprise would not 
be great nor would his capital requirements in the new enterprise be 
unduly large. It is self-evident that a very different situation obtains 
in complex industry. 

2. In complex industry a large part of the costs of operation is 
without any very definite relation to the volume of the business 
transacted. In the railroad business it may well happen that 60 
per cent of the total costs go on independently of changes in the 
volume of the traffic. This being true, it is not difficult to under- 
stand why the railroad manager who will develop new business is 
eagerly sought after; nor is it difficult to see the justification of build- 
ing branch lines which are not in themselves profitable, but which 
bring in a little more traffic for a long haul on the parent line. From a 
manager's point of view, it is clear that he should give low rates on 
cheap and bulky commodities in order to induce them to move and 
thus increase the volume of his business. Thus the significance of the 
principle of "charging what the traffic will bear" is apparent, as is also 
the interest of the public in reduced rates as business develops. 
Failure to reduce rates under such circumstances might mean excessive 
profits for a public utility. 

3. This is perhaps only another way of saying that under com- 
plex industry the relation between total cost of production and the 
price of the product may be neither clear nor definite. Total cost in 
machine industry may be divided into two parts: (a) those costs 
specifically incurred for a given unit of business and which are vari- 
ously known as prime costs, direct costs, or variable costs; (b) those 
costs which are largely independent of the volume of the business and 
which have been called supplementary costs, indirect costs, over- 
head costs, or constant costs. The preceding paragraph showed that 
it pays to get business at a price which is below total cost, provided 
that price is above prime cost. In addition to this situation, there 
are plenty of cases where it will be wise for the manager of a complex 
industry to continue his business even though the price received for 
his product does not suffice to cover even the prime cost. For 
example, it has been asserted that a certain railroad has throughout 
its history hauled coal at less than prime cost because the railroad 



552 BUSINESS ADMINISTRATION 

believed that this was the policy it must follow in order to develop 
manufacturing industries along its lines, and thus secure the traffic 
and profits involved in the hauling of manufactured goods. Another 
example may be found in the case of a manufacturer who believes 
that by a short war he may drive one or more of his competitors out 
of the field, and who accordingly cuts his price below even prime cost. 
Of course this cannot be expected to continue as a permanent policy. 
Another and a somewhat more subtle case is to be found when the 
price is to be cut below prime cost in order to develop added business 
of the same type. The logic of this situation lies in the fact that the 
increased volume of business may result in a different proportioning 
of the prime and supplementary costs through the introduction of 
special facilities for handling this new business. The consequence 
is that the price which was formerly below prime cost is now higher 
than prime cost because the prime cost (per unit) has fallen. 

4. It is difficult for the manager to have complete knowledge of 
the factors involved. On the organization (both commercial and 
industrial) sides of his work, this is readily seen. The pressure for 
added business generally brings about a steady increase in the scale 
of operations so that personal supervision and control are no longer 
sufficient. Impersonal devices must be called to the rescue. 

Of these impersonal devices, accounting, and especially cost- 
accounting, stands out prominently. Cost-accounting in simple 
industry would not be a difficult matter. It would involve no 
intricate computations. In complex industry, however, the cost- 
accountant must grapple with both direct and indirect costs. He 
must find methods of distributing the indirect costs over the units 
produced. If this is well done, it will be of great value, not merely 
with respect to finding what costs have been, but also with respect to 
determining what costs ought to be. 

5. Competition is not a satisfactory "law of trade" in complex 
industry, and the incentives to combination are exceedingly strong. 
The railroad industry again gives an excellent illustration: 

If once a rate war breaks out there seems to be no stopping-place. 
The field cannot be abandoned, for the instrument can produce 
nothing but transportation, and a large part of the charges (e.g., 
interest on bonds) would accumulate even if not a train moved. If 
traffic falls off, costs will not fall proportionately. It follows then, 
that a manager may go on for long periods " producing transportation " 
and collecting a rate which does not cover his total cost per unit, 



THE ADMINISTRATION OF PRODUCTION 553 

provided the rate covers added cost per unit or more. As has been 
seen, he may produce at less than added cost per unit. In addition, 
since the costs are largely joint costs, it may be impossible to know 
definitely until after it is all over just where the line between " paying" 
and "losing" business is (a situation particularly true in the earlier 
days of our railroads). It is not surprising that we have " Cut- throat 
Competition" under such circumstances. 

D. TECHNOLOGICAL INDUSTRY IS FREQUENTLY LARGE-SCALE 

INDUSTRY 1 

A manager who is trying to arrive at a size of maximum effi- 
ciency will continually be considering such questions as these: 

1. What effect will increased size have upon my costs of manu- 
facture ? Our study of indirect costs enables us to know some of the 
things which will pass through the manager's mind in this connection. 

2. What effect will increased size have upon my marketing 
problems, including both the purchase of materials and the selling 
of the finished product and transportation costs in both connections ? 

3. What effect will increased size have upon the ease of difficulty 
of bearing the risks of my industry ? 

4. Will the efficiency of administration, in relationship to its 
costs, be increased or diminished by a growth in size? 

As the manager studies these issues he sees cases where there are 
distinct advantages in large-scale production. 

The first great group of advantages centers around the lowered 
costs of production arising from such factors as these: (1) the spread- 
ing of the indirect costs of a business over a large number of units of 
business; (2) the better utilization of the principle of division of labor 
in the organization of the business; (3) the better mechanical equip- 
ment which large firms can afford to buy because they can spread the 
cost over more business; (4) cheaper power arising from the fact that 
power can usually be produced more cheaply per unit when produced 
in large quantities; (5) better utilization of waste, either through 
selling it in large quantities, or through the development of by- 
products; (6) the regulation of production by running some plants 
to full capacity, which is generally economical, and closing down 
other plants in seasons of short demand; (7) the maintenance of 
scientific laboratories leading to continual improvements in methods 
and processes. 

1 Adapted by permission from L. C. Marshall and L. S. Lyon, Our Economic 
Organization, dd. 2^0-64. (The Macmillan Company, 102 1.) 



554 BUSINESS ADMINISTRATION 

A second group of advantages centers about the greater ability 
of the large concerns to bear risks. [This is discussed in detail in 
chapter vii.] 

The third group of advantages has to do with the market, includ- 
ing both purchasing and selling, and embraces such matters as the 
following: (i) purchasing over a wide area enables the concentra- 
tion of purchases in the most favorable market under the most favor- 
able conditions; (2) there is greater probability of regular demand 
for products when the scope of operations is great, either with respect 
to the territories involved or to the wide range of commodities; 
(3) goods may be advertised more effectively, for advertising cost 
can be spread over a larger number of units of product; (4) lower 
transportation charges can usually be secured (a) by shipment in 
large quantities, since carload lots have lower rates than less 
than carload lots, (b) by distributing plants in various parts of 
the country so that the haul to the market will be a short one — this 
is sometimes called the saving of cross freights; (5) resources are 
available for the development of distant markets, and this may be 
highly important from the point of view of spreading indirect cost 
over more units; (6) through integration, the "market" connections 
of each unit are secured. 

The fourth group of advantages has to do with the administration 
of the business and includes: (1) the ability of the large concern to 
pay the amount necessary to secure a high-grade manager; (2) a 
corresponding ability to secure high-grade men in the subordinate 
positions, such as purchasing agents, salesmen, labor administrators, 
e tc; (3) a corresponding ability to employ high-grade technological 
experts, such as chemists, geologists, and accountants; (4) the 
ability to reduce the expenses of administration by eliminating some 
employees, for example, when integration eliminates the purchasing 
and sales agents who formerly made connections between two of the 
units or processes which are integrated. 

In spite of all these advantages the small firm still persists in 
many industries and we have no reason to suppose that it is fated to 
disappear. Its hold is particularly strong where either the raw 
materials or the processes concerned are not capable of standardiza- 
tion, for large-scale industry necessarily depends upon standardization 
and routine. It has a firm grip also in those industries where varying 
individual tastes of consumers must be met; or wherever the personal 
relation between buyer and seller is highly important. In producing 



THE ADMINISTRATION OF PRODUCTION 555 

"fitted" clothes, fine rugs, elaborately bound books, high-grade 
furniture, and all forms of art work, the small business unit continues 
to hold its own. Then, too, many small firms grow up as satellites of 
large plants. On the flanks of the great packing houses, for instance, 
are a swarm of smaller concerns that thrive by making repairs, 
building means of conveyance, using surplus by-product materials, 
and in other ways making themselves complementary to the larger 
concerns. 

Even in the fields which we have come to consider particularly 
appropriate to "big business" the small firm has by no means disap- 
peared. Sometimes it is favored by public opinion, and thus, through 
its customers rallying to its support, secures stability of demand. It 
always possesses the advantage of having its management in more 
intimate and personal touch with detail than can ever be the case 
with the large business unit; its employees are likely to take a keener 
and more intelligent interest in its affairs than will the employees of 
the routinized large-scale businesses. 

The size of maximum efficiency of a business unit may or may 
not be reached before it practically controls its field and is thus called 
a monopoly. What is the size of maximum efficiency in modern 
business ? There is no definite answer. It varies from time to time 
and from industry to industry. It depends upon the technique of 
production, upon the market and the administration of the market, 
upon the technique of business administration, and all these factors 
reach far back into the general social environment. There is, there- 
fore, no fixed goal with respect to the size of maximum efficiency. 
The goal has been up to this time a rapidly changing one. 



See also p. 745. Some Methods of Concentration of Control. 

p. 705. Relative Importance of the Main Forms of the 

Business Unit. 
p. 602. The Control of Large vs. Small Scale Industries. 



E. STANDARDIZATION IN MANUFACTURING 1 

At its best, as set forth by Mr. Taylor and as realised in practice, 
scientific management means a thoroughgoing in ovemenl and 
standardization of the material equipment and productive organiza- 
tion of the plant before an attempt is made to apply its peculiar 

1 Taken by permission from R. F. Hoxie, Scientific Management and Labor, 
pp. 21, 22. (D. Apple ton and Company, 19 16.) 



556 BUSINESS ADMINISTRATION 

methods and devices to the determination of standards of labor 
efficiency and wage payments. It means, thus, the installation of 
the best available machinery and tools so far as compatible with 
economy, or at least the overhauling and improvement of the existing 
equipment; the careful study of the materials of production and the 
determination of the speed and feed of the machines calculated under 
the circumstances to be most effective; the rearrangement of the 
material equipment so as to avoid the delays and expense of unneces- 
sary carriage of materials and partly finished product, and to secure 
so far as possible continuous straight-fine production; the introduc- 
tion of known and new devices for economical and expeditious hand- 
ling of materials and product; the careful study and analysis of the 
detailed processes and methods of production looking to the elimination 
of waste motions; the improvement of accessories, and the most effec- 
tive application of force and co-ordination of effort; the reorganization 
of the managerial staff with a view to avoiding so far as possible 
multiplicity of duties and to securing definiteness of function and 
responsibility and, therefore, managerial efficiency in every detail; 
the improvement of the methods of record-keeping and accounting 
so that exact knowledge may be had at all times of available equipment 
and materials on hand, their disposition, actual and prospective, that 
the productive needs of the concern may be met without friction or 
delay; reorganization of the sales and purchasing departments with 
a view to broadening and stabilizing the market for the product, 
and purchase by specification at the most economical rates and in 
accordance with needs; improvements in the methods of stores-keeping 
which insure sufficiency of stock on hand, quick delivery, and avoid- 
ance of interest and loss on superfluous and unusable stock; better 
methods of tool storage, care, and delivery; and many other material 
and organic improvements, all possible, theoretically precedent to 
and quite apart from the setting of new tasks; the introduction of 
new modes of payment or the alteration in general of labor conditions 
and relationships. 

See also p. 838. Standardization. 



B. Manufacturing Functions with Particular Reference to Control 

Our study of the preceding section has shown us something of the 
background, and a bit of the spirit, of modern producing activities. 
Production, more than any other division of business activity, has 



THE ADMINISTRATION OF PRODUCTION 557 

fallen under the influence of science. We rely upon technology to a 
far greater extent than have any peoples of the past to aid us in "our 
struggle with nature." 

In this present section we are to survey the control activities and 
problems involved in modern production as conducted in a manu- 
facturing plant. Since an introductory survey may deal more 
appropriately with similarities than with differences, we shall study 
these activities and problems in a somewhat abstract and gen- 
eralized way and shall avoid the detail that would be involved in 
working through specific manufacturing industries. We may properly 
omit much of the material presented in the orthodox manuals of pro- 
duction since such matters as location, plant construction, control of 
personnel, form of the business unit, and type of organization are no 
more connected with production than they are with other business 
functions. We shall confine our attention to the problems most 
directly concerned with the control of production, with the control of 
those activities having to do with "the creation of form utility." 

We begin (Selection 6) with an illustration of what is involved in 
modern manufacturing. It is, of course, an illustration in one field 
only and our minds should reach out to secure an appreciation of what 
is involved in other fields. The sampling method is continued (Selec- 
tion 7) by using "layout and routing" to illustrate the control problem 
in manufacturing. Selection 8 reminds us that this control problem 
varies with different types of industry, and Selection 9 shows us that, 
no matter what the type of industry may be, there are certain basic 
functions always present. Selection 10 gives us a sample of the prob- 
lems arising in the equipment function. 

We turn then (Selections 11-17) to some samples of the measuring 
and communicating aids of control which the production manager 
may use. Our interest in these aids is not primarily in their "how 
it is done." We are more concerned with their "what" and "why." 
Selection 17 takes up certain aspects of the control problem with 
particular reference to the scale of operations and the section closes 
with the presentation of a few organization charts of producing 
businesses. 

PROBLEMS 

1. Selection 6 shows what is involved in modern manufacturing in the 
case of preparing to manufacture a certain new product. How many 
of those issues apply to preparation for the manufacture of an established 
product ? 



558 BUSINESS ADMINISTRATION 

2. Should layout and routing problems be considered in planning an office ? 
a farm ? a kitchen ? Make a list of the factors involved in an appro- 
priate 'ayout of an office. Might fire aisles enter into the calculation? 

3. "A modern factory on mass production is like a river, the various ele- 
ments flowing like tributaries from the different departments and 
merging smoothly into the stream of finished product." What are 
the cost consequences of a failure of one department to perform? 
Does the quotation show you the significance of progress records, 
control boards, and pre-planning ? 

4. A writer says that ideally one should put up a factory building just to 
inclose properly arranged processing. What does he mean ? He also 
says this ideal can seldom be carried out. Why not ? 

5 What are the different types of manufacturing industry? Give illus- 
trations showing how the control problem varies with the different 
types. 

6. "Variety creates expense and quantity creates income." Explain. 

7. Compare Selection 9 with 6. Is the word "design" used in the same 
sense in the two selections ? Do you know the meaning of "planning," 
"design," "dispatching," "control board"? 

8. A manager is considering the substitution of a newly invented machine 
for his present ones in a given production department. What issues 
does this raise in your mind ? 

9. What arguments can you give for a separate toolroom under the control 
of a separate functionary ? 

10. Draw up a list of the wastes that are likely to be present when a business 
has expanded its buildings without having had from the very beginning 
some plan of expansion. 

11. "There is just one rule for constructing a building to house production 
and that is, employ a good architect." Comment. 

12. It has been urged that manufactures of machinery would do well to 
issue time-study material in connection with their sales literature. 
Why or why not ? 

13. What objections are there to having the foreman do the inspecting? 
Do you think that he should have no duties in this field ? 

14. "The price of a rigid system of inspection must not be a loss of good 
will." Explain. 

15. What are the gains coming from graphic schemes of control? 

16. In what types of industry are progress charts particularly useful ? 

17. Just what is motion study designed to accomplish as a control instru- 
ment ? time study? Compare the usefulness of "unit" time studies 
and "over-all" time studies. 

18. What steps are prerequisite to the making of a time study for purposes 
of task setting ? 

19. What is to your mind the outstanding argument for classification? 
for symbols? Do you gather that they are useful to the manager 



THE ADMINISTRATION OF PRODUCTION 



559 



only in the field of production? In production, in what types of 
industry are they most helpful ? 

20. What arguments can you see in favor of symbols composed of letters 
rather than numbers ? 

21. One writer gives the following list of possible items of indirect cost: 
Indirect material; oil; supplies; freight and express inward, when not 
charged to direct material cost; indirect labor; supervision; inspection; 
experimental; rent; taxes; insurance; interest; depreciation; main- 
tenance; repairs; power or power plant; light; heat; small tools; 
wastes of material, shrinkage of weight, defective work. Can you cite 
any items of direct cost ? 

22. Take the following arbitrary case of the cost and price of a single 
unit of a certain commodity: 



<- 








-> 










^_. ...... 








<-Prime or 


direct cost $400->| 






Direct 
materials 




Direct 
labor 


Products 

Department 
expense 


)n indirect or 

Factory 
expense 


overhead 

General 
expense 


Selling 
expense 
overhead 


Profit 


S200 




$200 


$100 


$75 


$50 


$50 


$100 



How could one know that $100 department expense should be assigned 
to this unit? $50 selling expense? Is cost accounting needed in 
marketing operations ? 

23. "An outstanding need of any manufacturing plant is accurate costs." 
Why? Can costs be predetermined? Would anything be gained by 
having them predetermined ? 

24. Precisely what is Gantt's point (p. 600) concerning idle machines and 
cost? 

25. One writer classifies the wastes in manufacturing as follows: 

1 . Material waste 

a) Raw material 

b) Finished material 

2. Time waste 

a) Direct time waste 

b) Efficiency waste 

3. Miscellaneous waste 

Put as much content as you can into this outline. Do you know how 
the wastes you cite can be eliminated ? 

26. "Cost accounting is a thing quite different from proprietorship account- 
ing." Explain. Does this mean that a producing concern must keep 
separate and distinct accounting systems for the two purposes ? 



560 BUSINESS ADMINISTRATION 

27 Draw up a list of factors making for a small scale of production. Speak- 
ing in generalizations, what factors enter into the determination of 
"the size of maximum efficiency" in a business ? 

28. In the case of a concern which is the result of a combination of several 
(formerly) competing concerns, what are the relative merits of central 
vs. local administration? How would it do to have centralization of 
policy formation and decentralization of management ? Is the solu- 
tion so simple ? 

29. Tabulate the savings resulting from standardization of machines; of 
products. Why have we not gone farther than we have in standardiza- 
tion of these items ? 

30. This is sometimes called the era of interchangeable parts. Does this 
presuppose standardization? Does it affect the control problem in 
production ? 

31. Taylor, after years of experimentation, drew up rules concerning tension 
and care of belts. He did the same in the field of metal-cutting. Were 
these contributions to production control? Be specific in your answer. 

32. Can you imagine a factory having the exact work of each machine 
planned out for each working minute for the next day ? the next week ? 
the next month? Is the problem related to the work of the sales 
department ? the finance department ? In what types of industry is 
such pre-planning most difficult to accomplish ? 

33. "Specialization really covers two ideas as the word is used in modern 
industry. The first idea is differentiation and the second is co- 
ordination of the differentiated elements." What is differentiated? 
Is it labor, or capital, or management, or plants, or territories? Is 
control of industry concerned only with that aspect of specialization 
which is here called co-ordination ? 

34. Some managers object to having an organization chart made out for 
their organization on the ground that it will result in inefficient control. 
How can they argue this? What- arguments can you advance for 
having an organization chart on the wall ? 



6. AN ILLUSTRATION OF WHAT IS INVOLVED IN 
MODERN MANUFACTURING 1 

As a practical illustration of what the modern system of manu- 
facturing consists of and how it is installed and carried on, I will take 
up the various arts called into use and necessary to the successful 

1 Adapted by permission from J. V. Wood worth, American Tool Making and 
Interchangeable Manufacturing, pp. 23-26. (The Norman W. Henley Publishing 
Comnany, 191 1.) 



THE ADMINISTRATION OF PRODUCTION 561 

constructing and placing on the market of a machine for which there 
is a large demand. 

After the developing and experimenting has reached a successful 
conclusion in a perfect working model, the first thing necessary is the 
designing and making of full sets of wood and metal patterns, to be 
used for casting the various parts which are to be cast. The man 
who does this must call into play a vast amount of ability and knowl- 
edge in order to accomplish this part of the work. He must allow 
of all parts being sufficiently strong, so that the castings resulting 
will withstand all strain to which they may be subjected when in use, 
and he must provide for giving them, as far as possible, a symmetrical 
and artistic appearance. He must also allow for shrinkage in the 
metal when cast and for a certain amount of surplus stock at all 
points which are to be machined and finished. 

After the pattern-maker has produced these patterns in exact 
duplication of the designs, they are sent to the foundry, where the 
moulder utilizes his skill and brains, and, with the patterns as models, 
a heap of sand and a few crude tools to work with, works out his 
moulds, from which a set of castings are produced. This set is first 
machined and finished by the use of the best means available, which 
calls into use all the capacity and skill of the machinist. After all 
parts have been finished and assembled, a finished machine is the 
result. Any defects in shape or strength in the patterns have now 
become apparent in the finished castings and the parts. The patterns 
are then carefully gone over and these defects rectified, and another 
set cast from them. This set is also finished and machined, and then 
assembled in another machine. This latter machine is found to be 
a great improvement over the first, as all defects and inaccuracies 
have been rectified and each and every part has been machined as 
accurately as possible. 

The machine now goes to the tool-designer, who is called upon to 
scheme up and design complete sets of tools, dies, fixtures, and appli- 
ances for the machining of all castings in repetition and for the exact 
duplication of each and every other part, from the largest shaft and 
gear to the smallest pin and screw. To be capable of accomplishing 
all this the designer must be — first of all — a practical man, familiar 
with all mechanical principles necessary to the successful construction 
of the tools, as well as be possessed of a theoretical knowledge of the 
properties of all metals. He must design the tools to be both positive 
and accurate, as well as strong and durable. He must also allow of 



562 BUSINESS ADMINISTRATION 

their being constructed as simple as possible, consistent with accurate 
production and rapid handling when in operation. He must, lastly 
be certain he is right in all measurements down to the smallest fraction 
of an inch. In fact, he must construct a perfect set of tools for the 
exact duplication of all the parts of the machine on paper. The 
designer must also provide for the tools being so constructed as to 
allow of being handled and operated to their fullest capacity by men 
of the average skill and intelligence, with rapidity and without the 
possibility of error. By the time the designer has accomplished all 
this and gone over and verified all his designs, until he is sure of their 
accuracy and of their coinciding perfectly where necessary, he has 
finished his part of the work. 

The tool designs and the machine now go to the tool-maker; he 
has the last, but not least, proposition to tackle. Where the pattern- 
maker had to produce his designs in wood, the draughtsman his on 
paper, and the moulder his in sand, the tool-maker has to create his 
in steel and iron, which can neither be whittled with a knife, nor the 
parts fastened together with glue, nor the mistakes and inaccuracies 
rubbed out with an eraser. Neither can the tool-maker shape his 
work in sand and locate the points with a trowel. He is the man on 
whom the accuracy, efficiency, and working qualities of the finished 
product depend. His skill, ingenuity, and powers of creation and 
production are taxed to their fullest extent indeed; and, unless he is 
a man of brains, skill, and experience, all work of the designer, pattern- 
maker, and moulder will have been useless. First in the machining 
and finishing of the tools and the placing of all locating points, and 
then in the assembling of the parts, is his knowledge and skill called 
into play. As each tool, fixture, or device for the production of some 
special and distinct part is finished, it must be tried and proved; and 
the piece machined in it must fit exactly in its proper position and 
coincide perfectly with all other points necessary in the other parts, so 
that the performance of its separate and distinct motion will be 
guaranteed. And thus on to the end of the list, until the full set of 
tools is complete, so that a perfect and complete machine can be 
constructed by their use, with the certainty that all parts machined 
in them will be found to interchange perfectly, so that they may be 
selected haphazard in the assembling of a new machine or in the 
repairing of an old one. When all the foregoing has been accom- 
plished, the preliminary work necessary to the successful manufacture 
and perfect operating of the machines in any number desired, with the 



THE ADMINISTRATION OF PRODUCTION 503 

certainty that each and every one will be an exact duplicate of the 
others, from the smallest pin or screw to the largest casting, is an 
accomplished fact. We may now go ahead and manufacture by 
means of the interchangeable system, which allows of the construction 
of machinery at the minimum of cost and to the maximum of pro- 
duction; and, what is more, allows of constructing machines in exact 
duplication of each other, which could not be accomplished by any 
other means. 



7. THE CONTROL PROBLEM ILLUSTRATED BY 
LAYOUT AND ROUTING 1 

It is quite apparent that our manufacturing methods may be 
divided into continuous and intermittent processes. In continuous 
processes the material goes in at the receiving end of the plant, is 
worked continuously, and appears at the shipping-room as finished 
product. In intermittent or interrupted processes, various materials 
may be worked to varying stages of completion and stored away, 
the machinery working on one article today and another tomorrow 
and assembly into finished products being carried on as is found neces- 
sary. 

Buildings are more easily adapted to fit the needs of continuous 
processes than to those of any other. Sugar refineries, flour mills, 
steel-rail mills and packing-houses are examples of continuous indus- 
tries where buildings often are closely adapted to the needs of the 
industry, and may often be so closely adapted as to be useless for any 
other purpose. At the other extreme are many industries that consist 
principally of assembling operations, little machinery being employed, 
and that of small size, the entire business consisting of small self- 
contained production centers. Floor space is the principal require- 
ment and, within limits, the building may be any shape. In some 
of these industries the density of the workers is almost the only limit- 
ing factor, so much so that legal restrictions are in force in many states 
to regulate the congestion possible in these callings. Between these 
extremes come all manner of manufacturing processes, each presenting 
a different combination of needs. 

The construction of a building perfectly adapted to a given 
industry presupposes a perfect knowledge of the character and capacity 

1 Adapted by permission from D. S. Kimball, Principles 0} Industrial Organiza- 
tion, pp. 234-42. (McGraw-Hill Book Company, 1913.) 



564 BUSINESS ADMINISTRATION 

of the several machines or processes to be used and the logical arrange- 
ment that must be made with them so as to carry the material through 
the plant most economically. In continuous processes this informa- 
tion is comparatively easy to obtain since the capacity ot each machine 
or set of machines devoted to any part of the work must bear a 
definite relation to other machines or groups of machines, or the 
other factors of the process; and the nature of the process usually 
dictates tne natural sequence of operations, or suggests such handling 
or conveying devices as may be needed to keep the process continuous. 
In other extreme cases, where assembling is the predominating factor, 
the problem is still easier; since here sequence is not a factor, the 
production units are small and the output a computable quantity. 
In intermittent manufacturing, however, this problem is often most 
difficult and always deserves more consideration than is usually 
accorded to it, not only in securing a balanced equipment but also to 
obtain any approach to a flow of material through the plant with a 
minimum of transportation expense. Obviously, here also no definite 
rules or method can be evolved for solving such problems, but there 
are certain general principles that apply to all plants and which may 
be worth noting. 

When the equipment of each department has been selected, with 
the foregoing considerations in mind, the internal arrangement of 
each department can be completed tentatively, at least, due considera- 
tion being given to transportation, storage, power, etc. The floor 
space so determined can be compared with similar departments if 
such data are obtainable. 

With the equipment of the several departments selected and 
tentatively arranged it will remain to arrange the several departments 
with reference to each other so that the material will pass through 
the plant with a minimum amount of traveling and handling, and so 
that the factory shall work smoothly as a whole. This conception 
of the plant itself as a machine is a helpful one. There are many 
existing factories where a careful analysis and rearrangement of the 
plant along the lines suggested would work wonders. 

The ideal sequence is obtained in some continuous processes, the 
building following the sequences naturally or the two being mutually 
adapted to each other. It is obvious that no such sequence or 
adaptation of building can be secured in the average case of inter- 
mittent production, many compromises usually being necessary. 
The general principle, however, should be applied as far as possible, 



THE ADMINISTRATION OF PRODUCTION 565 

particularly if a well-developed planning and routing department is 
proposed. This is true, not only of factories housed entirely in one 
building, but also of large plants occupying many buildings, with the 
added consideration of proper yard room and perhaps railroad 
connections. 

If the plant under consideration is a new one, care should be 
taken to provide ample facilities for additions and extensions in such 
a manner that the equipment may be kept balanced without serious 
rearrangement. Thus, extension can be made without changing the 
original plan of the works. An ideal building plan is one built on 
some "unit" system, like a sectional bookcase so that additional 
units can be added at any time without disturbing the manufacturing 
system and organization. A little forehanded planning of this kind 
will often save large sums when additions or extensions are necessary. 



See also p. 844. The Range of Time and Motion Study. 



8. THE CONTROL PROBLEM VARIES WITH DIFFERENT 

TYPES OF INDUSTRY 

A 1 

In manufacturing, if we separate work into different types, we 
are apt to classify them on the basis of the material or of the product. 
The broader plan — the plan in accord with modern principles of manage- 
ment — is to consider in the same type those in which the fundamental 
principles of treatment are alike. 

Every plant presents the necessity for all the principles ^ have 
indicated, but the principles vary as to relative prominence in different 
plants. Considered from the point of view of method of attack and 
manner of treatment, industrial plants may be considered in three 
groups in which variously predominate: (1) scientific research, 
required for a plant where the production is handled as a whole by a 
continuous flow, as in a paper mill or in a pulp mill, or a cement mill, 
and where the principal study must be devoted to standardization 
of methods and improvement in quality; (2) planning and routing, 
required as the first essential where, as in a printing shop or a shop 
manufacturing miscellaneous but standard products with independent 

Adapted by permission from S. E. Thompson, "Scientific Methods of 
Management Applied to Various Types of Industry," Bulletin of the Taylor Society, 
II (1916), 2-5. 



566 BUSINESS ADMINISTRATION 

machines, these also involving much detail because of small orders 
or numerous parts; (3) analysis and detail instruction required as the 
chief essential, such as in a mr chine shop, along with complex planning 
and routing. 

To illustrate what I mean by this grouping into types, I will take 
as an example two manufactories in which at first thought the indus- 
trial conditions are absolutely different, with no similar problems. At 
first thought, we would say that a plant making Portland cement is of 
a type as different as possible from a mill making paper. On the 
contrary (and in selecting these two examples, I am taking two 
processes which I know a little about) the two are essentially alike in 
type of management. I mean by this that the character of the prob- 
lems involved when viewed from the standpoint of the scientific 
method is the same, and similar principles of operation are required. 
In making this statement, I understand fully that the experience of 
a paper mill superintendent does not fit him for managing a cement 
mill. A cement mill manager, on the other hand, would be at sea in 
a paper mill. 

But let us consider the fundamental principles for a moment. 
In the paper mill, there are two chief raw materials, rags and pulp; 
in the cement mill there are two chief raw materials, one consisting 
essentially of limestone, and another consisting essentially of clay, or 
aluminous rock. In both cases, after certain preliminary treatment, 
the two raw materials go together, and then following a continuous 
process, not touched by hand until the product comes out in the one 
case at the end of the paper machine to the storehouse, and in the other 
case, from the grinders to the storage bins. The likeness is not 
merely superficial. In both products, quality is the chief aim and 
scientific research is necessary to determine the best way of attaining 
and retaining quality. In both, the character of the raw materials 
varies, and must be allowed for. In both the aim is to so mix these 
varying raw materials as to produce the product of required quality. 
In both the operation of the principal machines, in the one case, the 
beating engine, and in the other case, the kilns, are controlled, under 
ordinary methods of management, largely by judgment. In both 
processes, the manufacturer usually works backward, from the 
quality of the finished product to the raw material, and makes changes 
after having gotten the results from a previous run. 

I wish I had the time at my disposal to indicate more in detail, 
the special features required for different classes of industry. 



THE ADMINISTRATION OF PRODUCTION 567 

In the machine shop features requiring special attention and 
producing results are standardization of tools and machines, routing 
and instruction cards. 

In the bank, the chief item may be the development of the per- 
sonnel and the establishment of standard methods. 

In the pulp mill it may be a matter of research to determine the 
raw material and the methods that will produce uniformity. 

In the paper mill, it may be the standardization of the furnish 
and the handling of the beating engine. 

In the textile mill, it may be the classification of the raw material 
and the routing to the different frames and in the spinning room the 
systematizing of the doffing. 

In the shop manufacturing a standard product, it may be the 
investigation of methods to produce quantity and quality. 

In the construction work, it may be the ordering of materials, 
the systematic distribution, the training to the right method. 

B 1 

The relation of the variety of product to the quantity produced, so 
influences the art of manufacture and especially those branches dealing 
chiefly with arrangement of machinery and control of material in its 
processes through machinery, that it may prove of some assistance 
to the manager confronted with this problem if it be briefly discussed. 

Except as somewhat modified by highly standardized products 
repetitively manufactured, or when variety of design is the chief 
product for sale, variety creates expense, and quantity creates income. 
Therefore, in manufacture, the ratio of variety to quantity should be 
maintained as low as possible, consistent with the requirements for 
operation and service rendered by the product. In variety must 
also be included alterations to existing designs. 

Variety and quantity are related in manufacture in three principal 
forms of complexity: 

a) As finished groups composed of a variety of parts in varying 
quantities assembled in standard arrangement. This group is 
typified by chemical compounds, automotive mechanisms, and 
printing machinery. 

1 Adapted by permission from G. D. Babcock, "Influence of Variety, Quantity 
and Complexity of Product in Manufacturing Control," Industrial Management^ 
LXI (1921), 272-73. 



568 BUSINESS ADMINISTRATION 

b) As finished single items made from one material or mixture and 
disposed of unassembled, typified by forge and foundry products, 
spare parts for mechanisms and coinage. 

c) As finished single parts or assemblies obtained through dis- 
assembly of complex mixtures or compounds, typified by chemical 
elements, corn or other grain, packing house and coal tar products, and 
oil refining. 

Obviously all sorts of combinations of these principal classes 
occur in any single factory, but it is noticeable that its major product 
usually falls within one of them. These three forms of complexity 
indicate widely varying requirements in manufacturing management 
and methods for control. 

In the first (a) class (complex assembly) no part of the product is 
salable. The number of finished units for sale is usually small for 
given investment. The variety and quantity of parts in each finished 
unit is fixed. The period of time required for production is usually 
long. The variety of mechanical and other processes is usually large 
and calls for a varied training in the operating personnel. Any 
adjustment in the rate of output of the finished unit necessitates 
readjustment in the rate of production of each element of the work. 

This is truly a complex problem. There is no simple plan which 
can be applied for its control. Either the number of units produced 
must be so large that each producer works constantly on one opera- 
tion, or centralized planning or daily conference of supervisors to 
co-ordinate the effort must be provided. Either planning or con- 
ference is expensive, but the minimum investment is so large, and the 
chances for irregular delivery so great, that some intensive plan 
must be applied and thus prevent the manufacturing effort from 
"running wild." 

Of the two methods of supervision, the central planning for 
all activities is rapidly supplanting daily conferences. In central 
planning, standards are required. These standards may be estab- 
lished opinions of the members of the executive staff, applied, when- 
ever occasion demands, by the planning group. Even if these 
standards are but temporary, better and less costly results are 
usually obtained by planning. In times of emergency affecting es- 
tablished standards, or in the control of a product which is continu- 
ally varying, nothing will substitute for the conference. 

In the second (b) class (or a simple product) each part. is salable. 
Any variation in manufacture or sale of one part does not seriously 
disarrange the plans for another. There is no fixed relation of the 



THE ADMINISTRATION OF PRODUCTION 569 

parts in complex arrangement. The period of manufacturing time is 
usually short. The quantity of each item is usually large. 

Central planning is much simplified and exact control of output 
more easily obtained. If the quantity be increased to large amount, 
the requirements for central planning will decrease and somewhat 
change in form as in that of a complex product. Complexity will 
invariably decrease if variety is constant and quantity increases. 

There is, however, one particular problem in the manufacture 
of this class of product. The rate of demand for various parts is 
subject to frequent and large fluctuation. The anticipation of rate 
of demand and the control of stocks, both finished and raw, to deliver 
orders on time without excessive inventories, taxes to the extreme the 
most able planning group. 

In the third (c) class (disassembly of complex material) new plan- 
ning problems enter. Neither the variety nor quantity of elements 
remain exactly constant in the base material. They occur, however, in 
a proportion so nearly constant as to worry the management in the 
profitable disposal of those elements for which the demand is light, 
but which must be produced in obtaining those for which the demand 
is heavy. By-products occur in this class of manufacture, as it seeks 
to produce one or more of the single elements. A by-product may 
become a main product as uses and markets are developed. There is 
usually some useless residue from the original material or from that 
which is introduced in its refinement. The high order to which this 
class of manufacture has reached is shown in the packing industry. 

Although the quantities of each element planned for in this 
class are not constant, the probability of fairly uniform returns is 
sufficient to provide for approximate standards. The beneficial 
results secured in planning for a complex product can be likewise 
obtained for this class. This product by its nature has a large 
influence in manufacturing control, and calls into intensive play more 
members of the organization than does any other class. Production, 
storage, sales, distribution, and finance are all much affected. 

Through our various sources of study and of educational enlighten- 
ment, practically all of the problems entering into the art of manu- 
facture have been solved and are matters of record. The elements 
used in planning management are well established and limited in 
number. It is the work of combining these elements into methods 
fitting the problem that is most subject to error. It is errors of this 
sort, especially with regard to variety arid quantity of parts and 
complexity of their grouping made by inexperienced or incapable 



57© BUSINESS ADMINISTRATION 

consultants or employees, which has until recently delayed its general 
adoption. 

See also p. 778. There Is No Single Correct Form of Organization. 



9. FIVE ORGANIC FUNCTIONS IN MANUFACTURING 

INDUSTRY 1 

[The preceding selections have served to indicate the great range 
of control problems in modern manufacturing. If the mind is to 
really grasp these problems some system of classification must be 
used. The following selection will be found to justify careful reading 
and re-reading precisely because it reduces these problems to groups 
or classes.] 

In a manufacturing industry, according to the writer's examina- 
tion of the subject, the objective of the whole, namely, production, 
is realized by a synthesis of five organic functions, which are invariably 
present in every type of industry, but to very different extent in each, 
just as an army may require a great development of transport or 
it may not. These five organic functions are design, equipment, 
control, comparison, and operation. 

DESIGN 

Taking the first of these organic functions into consideration — 
that of design — it will be obvious that this must exist in every 
industry, but in a very different degree of development in some 
compared with others. In a chemical industry, for example, it exists 
in a very elementary form, that of a mere formula of mixture. In 
an electric manufacturing or a heavy engineering plant, on the 
other hand, it exists in the most highly developed state; it demands 
an elaborate equipment, a large staff, a collection of experts, a close 
and continuous touch with every detail of life in the shops. But the 
important point is that both the elementary and the highly developed 
condition in which we find this function have exactly the same end 
and aim, namely, that of prescribing in advance the changes which 
shall successively take place in material. 

In its fullest development the function of design covers the 
following items: 

1 Adapted by permission from A. H. Church, The Science and Practice of 
Management, pp. 28 ff. (The Engineering Magazine Company, 19 14.) 



THE ADMINISTRATION OF PRODUCTION 571 

1 . The Piece or Other Unit of Manufacture: 

a) Nature of material. — May include specification of constitution 
of material, such as iron, steel, brass, yarns, or other particular 
materials, and alloys, or other particular kinds of mixtures; and of 
physical properties, such as hardness, elasticity, elongation, etc. 

b) Shape and dimensions. — May include specification of margins, 
allowances, fits, tolerances, and prescribe sizes of sheets or rolls from 
which the pieces are to be cut and "number out." 

c) Other properties. — Specification may include the prescription of 
surface-finish, patterns for markings, color or shade, etc. It may 
also be concerned with exact quantities, as in chemical manufacture. 

2. The Accessories Peculiar to the Manufacture of the Piece: 

a) Template, jigs, etc. — In addition to the design of the unit of 
product, it may be necessary to design special jigs, templates, or 
cards, and special machine fixtures. 

b) Tools. — In some industries it may be desirable to specify the 
exact tool, drill, broach, reamer, or tap by which the dimensions are 
to be realized or the special type of cutter or other standard accessory 
to be used on the jobs. This is chiefly for the purpose of securing 
accuracy and saving time in the operation department. 

c) Special rigging. — It is sometimes necessary to design temporary 
devices for handling unusually bulky, heavy, or awkward pieces. 

d) Machines . — In some cases the new product may demand a novel 
kind of machine, jr a reconstruction of an old one, which has then 
to be designed specially. 

3 . The Details of Operation: 

a) *The method. — May include specification of the particular ma- 
chines to be used, and their speeds and feeds, the sequence of opera- 
tion, the sequence of handling at each operation, etc. 

b) *The time. — May be specified as preparation time and operation 

time. Details may be carried very far, and time of every motion in 

extreme cases may be specified. 

*These items of specification are necessary in proportion as the science and 
practice of operation is at a low level, or where, as in some machine shops, there 
is a great variety of work at each machine. In proportion as the scope of machines 
is limited, i.e., where they can only do one thing at one speed, in one way, the 
necessity for this class of detail disappears. In some industries there is almost 
no room for it. 



See also p. 560. An Illustration of What Is Involved in Modern 
Manufacturing, 
p. 624. Control of Manufacture under the Taylor System. 



572 BUSINESS ADMINISTRATION 

EQUIPMENT 

Again, the nature of the equipment and the method of its employ- 
ment may be entirely different in a paper mill, a foundry, and a soap 
factory; but yet each must have equipment, and in each certain laws 
as to the use of such equipment must be observed in the same way. 
In each there will be a layout more efficient than any other, in each 
there will be decay and replacement of equipment, depreciation, 
maintenance and repair, etc., quite irrespective of the kind of equip- 
ment or its uses. On the other hand, the lay-out of equipment will 
be much more important in some industries than in others. Product 
that can be pumped through pipes, or conveyed on endless bands, 
is much more independent of physical lay-out than one which demands 
great effort to move it even a short distance. Every variety of 
equipment will have its own problems, but a large number of these 
problems are common; that is, they differ in degree and not in 
kind. But in no case is equipment absent altogether. 

In its fullest development the function of equipment covers the 
following matters: 

i. Installation or Engineering Selection: 

a) Buildings. — Allotment of different parts of buildings to suitable 
uses, i.e., the lay-out of departments, installation of appliances for 
lighting, heating, ventilation, fire protection, etc. 

b) Power plant. — Selection of the right type of plant, and suitable 
means of distributing and delivering power where required. Con- 
sideration of the margin of power necessary. 

c) Materials. — Provision of adequate equipment for storage and 
conveyance of materials. Storage racks, bins, fixtures, cranes, 
travelers, trucks, conveyors, etc., considered in reference to the 
volume of work and lines of travel. 

d) Machinery. — Provision and installation of machinery and 
design of lay-out in relation to travel of product. 

2. Maintenance or Administrative Use: 

a) Buildings. — Repair and maintenance of structures, maintaining 
an adequate service of light, heat, ventilation, and fire organization. 
Keeping premises clean and bright. 

b) Power.- — Keeping up supply of power in right quantity, during 
right period, on an economic basis. Attending to storage of fuel 
against contingencies, oiling shafts, maintaining belts, and so forth. 



THE ADMINISTRATION OF PRODUCTION 573 

c) Machinery and appliances. — Repairing and maintaining all 
kinds of equipment in working order. 



See also p. 76. The Interdependence of Construction and Equip- 
ment with Site Location. 
p. 578. A Sample of Problems Arising in Manufacturing 
Functions. 



CONTROL 

The function of control is also obviously common to all manu- 
facturing plants. Broadly stated, it is the function of the "boss." 
But as the boss cannot subdivide himself, and cannot attend to all 
the matters necessitating control, this function requires more or 
less development according to the industry. In some, such as 
continuous industries where product is subject to a fixed and un- 
varying sequence of manipulations wholly conditioned by the nature 
of the machinery employed, control does not need great elaboration. 
In other industries, such as engineering manufacture, the multiplicity 
of processes and parts, the necessity of storing, handling, and moving 
innumerable articles of product, the importance of taking care of 
the element of delay, the necessity to co-ordinate instructions and 
material so that one does not have to wait for another, means a high 
degree of elaboration of the function of control, and it is consequently 
this function that commonly gets over-organized and smothered 
under folds of red tape. But no industry exists in which control 
does not need intelligent organization on its own merits. 

In its fullest development the function of control covers the 
following matters: 

1. Installation of Control — The Delimitation of Duties: 

a) Within the other organic functions. — Commencing with the heads 
of departments, i.e., the men who are in charge of the organic func- 
tions of design, operation, equipment, and comparison, it plans their 
duties, decides what subordinates they should have, and what 
specific duties these subordinates should fulfil. It therefore plans the 
interior structure of the systems by which these functions are exercised. 

b) In its own special department. — It plans the relations between 
the above departments, and says which persons shall confer, and 
when. It arranges all the specially administrative duties, such as 
ordering, receiving or storing material: receiving customers' orders 
and passing them to the various departments concerned; supervising 



574 BUSINESS ADMINISTRATION 

the current work of all departments, in the light of costs, wastes, 
delays, poor work, and other irregularities. It arranges all this by- 
planning specific duties for specific persons, including the organiza- 
tion of specialists' advice or "staff" assistance. 

2. Administrative Function of Control — Supervising, Ordering, Instruct- 
ing, and Training: 

a) Within the other organic functions. — Once organized under a 
head, each function is to a great extent autonomous. In other 
words, control of the departments of design, operation, equipment, 
and comparison is exercised through the heads of these departments, 
who are responsible for seeing that their subordinates are carrying 
out their duties as planned originally. 

b) In its own special department. — Administratively speaking, con- 
trol is the great co-ordinative function. It sets everything in motion 
by issuing orders. Its particular task is to issue orders in such a way 
that, when all have been carried out, the result is exactly what was in- 
tended. It also observes failures, studies their reasons, and sets in 
motion the mechanism of instruction or training to prevent similar 
failures in the future. 

See also pp. 581-602. Measuring and Communicating Aids. 

p. 624. Control of Manufacture under the Taylor System, 
p. 149. Education and Training. 



COMPARISON 

Similarly, there is no industry in which the function of com- 
parison does not exist. In "continuous" industries, where what is 
being done today at twelve o'clock will be done tomorrow at the 
same hour, comparison is at its lowest development, though even 
here there are often analyses to make, temperatures to watch, 
operatives' attendance to check and so forth. For comparison deals 
with the record of quantities, whether such quantities are expressed 
in time, money, degrees, levels, or other notation. It therefore 
includes testing, inspecting, and cost accounting. Any data which 
are of significance at all are only so by comparison. This com- 
parison may be with previous or future work of the same kind, or 
it may be with standards. And such standards, again, may be 
specified standard set up by design, such as limits, fits, or dimensions, 
or may be comparisons between time allowed for a job, and time 
taken, or may deal with physical standards such as temperatures, 
pressures, degrees of vacuum, specific gravity, and so forth. But 



THE ADMINISTRATION OF PRODUCTION 575 

all these cases postulate two things: (1) the observation and record; 
(2) something by which to judge the value of the observation and 
record. No industry is without need for some of these methods of 
comparison, while in many industries a very considerable develop- 
ment of the function is both proper and profitable. 

In its fullest development the function of comparison covers the 
following matters: 

1. Technical Sphere of Comparison: 

a) Chemical analysis. — Compares the composition of materials 
with purchase specifications (which are, of course, based on standards) 
and with the standards specified by design as to use of formulae of 
mixture. Embraces all comparison other than physical, i.e., all in 
which the constituent elements of bodies need to be compared with 
standards. 

b) Physical analysis, or inspection. — Compares the physical con- 
dition of materials which have been purchased or made with the stand- 
ards specified by purchase or design, such as regards dimensions, color, 
pattern, surface finish, etc. Carries out physical tests for hardness, 
elasticity, elongation, tensile strength, etc. Passes on all physical 
properties not necessitating analysis. 

2. Accounting Sphere of Comparison: 

a) Time. — Records results of work of which the efficiency is 
measured in time, and compares with standards. Thus, attendance of 
employees, working and idle time of machines, time of operations in 
which result is dependent on duration, as in some industries, where 
product is matured, seasoned, etc. 

b) Quantity and number. — Records fluctuations which are ex- 
pressed in quantity or number, such as quantity of material in stock, 
consumption of tons of fuel in proportion to pounds of steam raised, 
number of employees present and absent, weight of components 
passing into a mixture, etc., and compares these figures with standards. 

c) Value. — This is the sphere of cost accounting. Records the cost 
of labor, expense, and material, as and when incurred and used, and 
compares with standards. Classifies the results of work as utilized 
capacity and waste. Groups labor, expense, and material so that 
the cost of jobs is ascertained and compared with expected or standard 
cost of such job. 

See also p. 370. Measuring Aids: Testing in Connection with 
Purchasing. 

p. 581. Measuring and Communicating Aids: Inspection. 

p. 595. Measuring and Communicating Aids: Cost Ac- 
counting. 



576 BUSINESS ADMINISTRATION 

OPERATION 

The final organic function found in manufacturing is that of 
operation. This comprises the exercise of manual skills, trades, 
and callings, usually by way of operating machines, but not neces- 
sarily so. Just as the prime organic function of an army is the 
fighting corps, so the prime organic function of a plant is that of 
operation. Just as a transport corps will not win battles, though it 
may lose them; so the organic functions of design, equipment, 
control, and comparison will not make an ounce of product, how- 
ever well arranged, though if badly arranged they may lose the 
battle of competition very easily indeed. Operation is definable as 
the act of changing the status (that is, the form, dimension, or com- 
position) of material in accordance with the specification of design. 
In practical language it is the work of the shops, but only the operative 
work of the shops. It does not include foremanship, which is part 
of control; or inspection, which is part of comparison. It goes 
without saying that operation is a function present in every plant 
of every kind. 

In its fullest development the function of operation covers the 
following matters: 

i. The units of operation. — Operation is the synthesis of a number 
of separate trades, skills, and processes. Usually, but not always, 
these are exercised through the operation of machines. In most 
modern industries machines occupy nearly the whole field, and such 
hand skill as remains is usually in the nature of producing greater 
refinement of finish than machines can be made to give. Every 
distinct skill or machine process is a unit of operation. Operation 
itself depends for its efficiency on the application of processes to 
units of product in accordance with the best technical practice. 

2. Preparation for operation. — In some industries, whenever prod- 
uct is varied, it becomes necessary to modify, add to, or take away 
some accessory of the machine. This is termed preparation and should 
always be reduced as much as possible, as it is a loss to production. 
It is generally considered to include, also, restoring the machine to 
normal condition and cleaning up after a job. 

3. Operation. — Operation is the actual technical work of cutting, 
pressing, twisting, heating, weaving, mixing, assembling, etc., as 
performed on the material in accordance with the specifications of 
design, and by aid of the best technical effort able to be put forth 
by the operator. 



THE ADMINISTRATION OF PRODUCTION 577 

Note. — Operation does not include anything but the application of technical 
skill to transform and transmute material. Therefore it does not include in- 
spection, maintenance, or the handling of product at any other time than when 
putting it in position for operation and removing it from the machine. 

SUCCESSIVE DEVOLUTION OF THE ORGANIC FUNCTIONS OF MANUFAC- 
TURING DURING THE RISE OF AN INDUSTRY TOWARD 
MODERN CONDITIONS 

Stage 1. Beginnings of industry. — The craftsman exercises all the 
manufacturing functions in his own person. (Selling and finance are 
not included in this discussion.) "The day of small things." 

Stage 2. Devolution of operation. — A workman and apprentices 
are engaged for the manual or operative work. The workman 
exercises supervision and becomes in course of time a fully fledged 
foreman. Later he has to devolve some of his duties on other fore- 
men, and is called superintendent. (Once an organic function is 
separated out, devolution goes on within it.) At this stage the 
owner looks after everything else, but ceases to do operative work. 

Stage 3. Devolution of equipment. — Equipment begins to assume 
importance. A mechanic is engaged to run the power plant, attend 
to repairs, and do odd mechanical jobs. Later we see him represented 
by a " works engineer " with a power staff, a repairs staff, an electrician, 
etc., on whom these specific tasks have been devolved. 

Stage 4. Devolution of design. — The owner finds it necessary to 
devolve the preparation of designs and drawings, and so engages a 
designer and frees himself from this function. The designer's work 
grows and is devolved on subordinates until we may find ultimately 
a chief engineer, chief draftsman, a production engineer, an experi- 
mental staff, etc. 

Stage 5. Devolution of comparison. — Up to this point the owner 
has only guessed at costs, from rough memoranda compiled by him- 
self. He now devolves this work on a cost clerk, who represents 
the accounting side of comparison. As the business develops, the 
cost clerk has to devolve details on others, and becomes an account- 
ant, with subordinate pay clerks, time clerks, stores-record clerks, 
etc. Also the owner ceases to "pass" on each piece of completed 
work, and devolves this task on an inspector, who represents the 
technical side of comparison. Later the inspector's work expands 
until we find a fully developed testing and inspecting department. 

Note. — At this stage all the activities of administration, exercised by the 
owner of the business at the beginning, have been devoluted to organic functions 



578 BUSINESS ADMINISTRATION 

(themselves made up of groups of individuals with specific duties) , save and except 
hi? personal controlling and supervising work — or, in popular language, his function 
as "boss." This latter work, however, soon outgrows the possibility of his attend 
ing personally to all of it; hence we arrive at: 

Stage 6. Internal devolution of control. — Control, which remains 
vested in the owner of the business, is exercised by means of a regular 
internal devolution of this function. It begins with the owner him- 
self, who is directly supervising the heads or executives who have 
been placed in charge of the functions already separated out (as 
above), and also goes down through the purchasing agent, store 
keeper, order department, correspondence office, tracing depart- 
ment, shipping office, and so forth in definite lines of devolu- 
tion for special duties. Later we find the organization of "staff 
assistants and advisers, whose expert knowledge is at the service of 
those requiring it. . 

Note. — The five organic functions are now completely separated and organ- 
ized and each has its own internal system of devolution, enabling it to fulfil its 
special purpose. Our discussion of the problem of management as presented in 
this book ends here The organization for manufacturing is now complete. But in 
large businesses the owner (or the board of directors representing the ownership) 
withdraws still further from actual contact with routine. We then reach: 

Stage . Final stage. — The administrative and the determinative 
elements of management are separated. The former is devolved on 
a president or general manager, who is personally responsible for 
the correct working of the five functions of administration. The 
determinative element is reserved by Jie directors as their special 
field. They decide on points of policy. 

10. A SAMPLE OF PROBLEMS ARISING IN MANU- 
FACTURING FUNCTIONS 1 

[In a survey course it is not possible to discuss many of the details 
arising in the five organic functions sketched in Selection 9. That 
these details are multitudinous may be seen from the following outline 
treatment of the issues which come up in connection with selecting 
and installing machines. This is, of course, only one phase of the 
equipment function. For such discussion as we have been able to 
give other phases of this function see page 76, The Interdependence 
of Construction and Equipment with Site Location, and page 374, 
Purchase and Stores under Unsystematized, Systematized, and 
Scientific Management.] 

4 Adapted by permission from Library of Factory Management, II, 71-75. 
(A. W. Shaw Company, 1915.) 



THE ADMINISTRATION OF PRODUCTION 579 

A. Points to consider when choosing machinery 
I. Cost factors 
i. Investment 

a) Initial cost of machine 

b) Cost of accessories 

c) Installation 

d) Depreciation 

2. Operational 

a) Upkeep and repairs 

b) Supervision 

c) Power 

d) Wages of operator 

3. Final 

a) Hourly charge when idle 

b) Hourly charge when running 

c) Normal productions per hour 

d) Unit cost of production 

II. Design factors 

1. Materials of construction 

a) Kind used for different parts 

b) Distribution of metal 

c) Strength and stability 

2. Power 

a) Is it abundant ? 

b) How applied ? 

• c) Is control centralized ? 

d) Are heavy parts power-moved ? 

e) Is direct motor-mounting provided ? 

3. Lubrication 

a) Forced ? sigh-feeds used ? 

b) If not forced, oil holes accessible ? 

c) Oil and grease cups on bearings ? 

d) Gears inclosed ? run in oil baths ? 

4. Bearings 

a) Ordinary 

b) Ball bearing 

c) Roller bearing 

5. Method of chucking work 

a) Ordinary 

b) Magnetic 

c) Air controlled 



580 BUSINESS ADMINISTRATION 

6. Safety 

a) Machine 

b) Operator 

7. Speed changes 

a) Number and ratio 

b) Quickness of change 

8. Operation 

a) Friction 

b) Vibration 

c) Ease of feeding and discharging 

d) Self-helping attachments 

9. Repairs 

a) Are wearing parts interchangeable ? 

b) Accessible, and easily changed ? 
ic. Miscellaneous 

a) Facilities for quick set-up 

b) Other kinds of work possible ? 

c) Is it easily movable ? 

d) Rigged for use of cutting lubricant 

e) Fit location available ? 

B. Readjusting production when you instal new machines 
I. Workmen must be taught to 

1. Tend more than one machine 

2. Keep tools in condition 

3. Keep magazine filled, if automatic 

4. Provide sufficient oil supply 

5. Remove parts and clean out chips 

6. Keep close watch on operations 

II. Shop routine must be altered to 

1. Insure ample work ahead at all times 

2. Provide continuous removal of finished product 

3. Give ample facilities of raw stock and finished product 

4. Keep tools always fit and laid out for next job 

5. Permit long runs on each set-up 

III. Business and selling policies must be revised to 

1. Meet new schedules, if such are necessary 

2. Fit change in labor conditions, if extensive 

3. Create new and permanent demand for increase in output 

4. Insure permanent service of the new equipment, if product 
changes 



THE ADMINISTRATION OF PRODUCTION 581 

11. MEASURING AND COMMUNICATING AIDS: 

INSPECTION 1 

[This selection should be closely connected in your reading with 
Selection 9. Inspection was there listed as one of the three main 
elements in comparison. This present selection gives a hint of how 
the discussion of all the functions mentioned in Selection 9 may be 
elaborated.] 

While the necessity of inspection depends to a certain degree upon 
the nature of the product, it is a question as to just how far, when, 
and where it pays to inspect — as to whether it pays to inspect each 
component part minutely, as to how often a part should be inspected, 
and as to where it should be inspected, in a central inspection depart- 
ment or otherwise. 

The possibilities and scope of a system of inspection have enlarged 
greatly with the development of specialization. While formerly the 
chief aim of inspection was to prevent the necessity of hand fitting, 
the adage being that "an ounce of inspection is worth a pound of 
fitting," an up-to-date inspection system is planned to accomplish a 
varied number of ends, among which the following are the most fre- 
quently sought:, 

1. To prevent loss in prestige due to non-uniformity or defects in 
product which may cause accidents or delays. 

2. To prevent necessity of hand fitting. 

3. To prevent expense of replacing defective parts. 

4. To prevent additional labor on parts already spoiled. 

5. To prevent acceptance of defective raw material. 

6. To pay workmen only for good workmanship. 

7. To prevent decrease in quality due to an increase in quantity 
caused by the introduction of wage systems. 

8. To stimulate good workmanship through the moral effect of 
keeping records of defective workmanship. 

9. To point out imperfections in machines and processes as well 
as in workmanship. 

10. To point out proper allowance for unavoidable loss in making 
cost of price estimates. 

11. To point out operations in which the workman must be better 
educated or instructed. 

Adapted by permission from A. D. Wilt, Jr., "The Relation of Inspection to 
Money-making Shop Management," in The Engineering Magazine, XXXII (1907), 
725-36. 



582 BUSINESS ADMINISTRATION 

12. To stimulate good will through fairness in fixing responsibility. 

An inspection system may be operated for one or all of these pur- 
poses, but it may not always be devised so as to accomplish all of 
them. The inspection necessary to produce a perfect automobile, 
adding machine, or cash register may be entirely unnecessary to pro- 
duce one of the so-called "tonnage" products, such as rolled steel 
bars or castings, or such products as cloth and leather. But never- 
theless the same principles of shop management are involved in every 
case, and can be applied in varying degrees to any class of manu- 
facture. Upon the degree to which they can be applied — upon the 
certainty with which several conditions can be satisfied — depends the 
success of any plan of inspection. 

Conditions which must be satisfied before it can be determined 
how far, when, and where it pays to inspect are as follows: 

I. Responsibility must be fixed with certainty. 

II. The price of a rigid system of inspection must be not a loss 
of good will. 

III. The authority of an inspector must end when he has passed 
upon the quality of the work. 

It is safe to postulate, at least, that his authority could cover the 
following functions: 

1. That of detecting the defect. 

2. That of detecting the cause — locating the responsibility. 

3. That of prescribing the remedy. 

4. That of administering the remedy — of disciplining or instruct- 
ing the responsible party. 

5. That of reporting the defect. 

An ideal system of inspection is one which will enable the inspector 
to express his opinion as to the cause of the defect, and leave the 
duty of placing the responsibility and disciplining the men to a higher 
authority. 

IV. The responsibility of detecting defects must be placed on 
the operator as well as on the inspector. 

V. Comparative records must be kept of all appreciable rejections 
Many different plans of inspection have been devised which will 

accomplish some or all of the benefits that have been pointed out. 
Each plan must depend more or less upon the nature of the product. 
It would be impracticable to rely entirely upon a plan of centralized 
inspection in the manufacture of boilers or safes, but as many of such 
large products contain some small parts, it might pay to have both 



THE ADMINISTRATION OF PRODUCTION 583 

central and local inspection. It is therefore impossible to recommend 
any one particular plan for all classes of manufacture, so only the 
particular features of the plans in most general use will be pointed out. 
Most of the plans of inspection are variations of one or more of 
the following: 

1. Local inspection by traveling inspectors. , 

2. Local inspection by foremen. 

3. Departmental inspection departments independent of depart- 
ment foremen. 

4. The centralized inspection department. 

5. The "chain" plan of inspection. 

1. The plan of local inspection by traveling inspectors. — The 
distinguishing principle of this plan is that each production center is 
visited by a traveling inspector. Either this plan, or that of having 
local inspection by foremen, is essential in the manufacture of large 
products which cannot be readily transported. 

2. The plan of local inspection by foremen. — Some manufacturers 
have attempted to secure the benefits of traveling inspection by 
placing the whole duty of inspecting upon the foreman. This is prac- 
tically the same principle as setting a thief to catch a thief, for as a 
foreman is partly responsible for the spoiled work in his department, 
it naturally is not to his interest to report all defective work. The 
many duties of a foreman generally prohibit his assuming the direct 
responsibility of inspecting, so sometimes the plan is adopted of 
having a small inspection department in each department. 

3. Departmental inspection departments independent of department 
foreman. — The inspector in this plan is generally not under the 
department foreman. The stock is inspected and counted just 
before it leaves the department. In this way the responsibility is 
fixed with quite a degree of certainty and celerity, and it is practical 
to have the duty of inspector end when he has located the defects. 
Its chief drawbacks lie in the difficulty of preventing collusion between 
the inspector and foreman. 

4. The plan of centralized inspection. — It has become almost an 
axiom in factory management that the greater the centralization or 
specialization, the less is the cost of manufacture. While this does 
not necessarily follow in all cases, I have become convinced that it 
pays in the function of inspection. It pays because but one skilled 
inspector is necessary, for an inferior grade of labor can be employed 
to do the routine inspection, owing to the fact that the responsibility 



584 Business administration 

of the inspectors is narrowed down to the simple duty of detecting 
and reporting defects. The chance for partiality is reduced to a 
minimum, and consequently the chance for ill will, owing to the 
isolation of the inspection department from all other departments. 

The chief claims for merit in this plan are its economy, its security 
from collusion, and the surety with which it supplies reliable records 
of all rejections. 

5. The chain plan of inspection. — The " chain" plan is practical 
only in the manufacture of such products as will permit of a sequence 
of operations in one department. The plan is to have the last man in 
the "chain" do the inspecting. Advantage is frequently taken of the 
opportunity to pay all operators in the chain only for good work 
turned out at the end of the chain, the theory being that this compels 
each man to goad on the other fellow to increase his output as well as 
to turn out accurate work. When this is done it seems to me it be- 
comes a " chain-gang " plan. It has the merit of preventing additional 
labor on defective work, but is so conducive to ill will that it is not 
used very extensively. 

There are other plans of inspection, most of which are variations 
or combinations of the above. It has been my experience that in 
every case their efficiency can be measured by the degree with which 
they satisfy the five given conditions, namely: certainty in fixing 
responsibility, success in preserving good will, efficiency in delimiting 
the inspector's authority, surety in making the operator detect defects, 
and accuracy in providing records of appreciable rejections. 

12. MEASURING AND COMMUNICATING AIDS: GRAPHIC 
PRODUCTION CONTROL 1 

[As time has gone on, many schemes of using graphic methods of 
control have come into use. The diagram shown on page 585 gives a 
hint of the possibilities in this field.] 

The three factors influencing the processing of materials are: 
Plant arrangement, shop transportation, control of production. If 
we analyze these three a moment, it will be found that the best plant 
arrangement with the most efficient shop transportation methods 
will not insure results if the methods of production control are at 

1 Adapted by permission from C. E. Knoeppel, " Graphic Production Control," 
Industrial Management, LVI (1918), 383-90. 



THE ADMINISTRATION OF PRODUCTION 



5S5 



fault. On the other hand, given the most efficient methods of pro- 
duction control, with only a fair degree of efficiency as to arrangement 
and transportation, and better results will be forthcoming than in the 
case just mentioned. In other words, provide proper production 
control first, then tone up and make better the arrangement of plant 
and the shop transportation of materials. 



GENERAL SCHEME OF GRAPHIC CONTROL 



GRAPHIC PRODUCTION CONTROL 



IWMATfS SHOWN 



FUNDAMENTAL COIWITlOtt 
60YERN/NS 
PRODUCTION 



69 VITAL FACTS NECES' 
SARY FOR SHOP 
MANAGEMENT 



JOB ON MACHINE NEXTJOB 
AHEAD, WORKDISTRIBUT- 
I0H TIME KEEPING 



mHKKmKHASmKME 

ATAWIHOUROFTNEDAySA 

MEASURE OF EFFORT 



\6RAFHIC ELEMENTS] 



CHARTS 



1 
1 




A 


ALL DATA THAT MUST BE 
KNOWN ABOUT 
AMY ORDER. 




PROGRESS 
RECORD 





GRAPHIC 
CONTROL BOARD 



I 



DISPATCH 
BOARDS 



PRODUCTION 
DIALS 




\HOWIT IS SHOWN 



CURVES OF 
OIFFERBMT 
COLORS 



STRAIGHT LINES FOR 
UH6TH0FW0RK/UYrUNES 
FOR ACCOMPLISHMENT 



SEE DIAGRAM AH0 
DETAILED 

INSTRUCTIONS 



CARDS IN RACKSJIME 

PUNCHED BY 

DISPATCH CLERK 



CL OCKFORM, MOVABLE 
HAND. ADVANCED BY 
FINAL PROCESS INSPECTOR. 



With this fundamental in mind, the next step is to create a 
mechanism to take over the work of intelligently and efficiently 
controlling production. This should be done through the organiza- 
tion of a control department, a phrase which means more than 
"Production Department" or "Planning Department." 

What will this control department control? Let us determine 
what the elements are. The activities of the workmen must be 
guided or there will be only ordinary results in production. The 



586 BUSINESS ADMINISTRATION 

movement of material as to purchase, receipt, issuance and trans- 
portation must be intelligently guided. The work to be done or the 
operations must be known and properly defined. The equipment 
(machines, tools, jigs and fixtures) must be in readiness for the work 
that is to be done. Hence we have four elements in control under 
which can be classified all factors influencing production, as follows: 
labor, which does the work; material, on which the work is done; 
operations, which is the work done; equipment, with which the work 
is done. 

If one or more of the four elements are neglected in, or eliminated 
from, any plan of production control, graphic or otherwise, do not 
look for any substantial results, for they will not be forthcoming. 

Control brings labor, material, work and equipment together and 
co-ordinates them for efficient manufacture. 

13. MEASURING AND COMMUNICATING AIDS: 
A PROGRESS CHART 1 

[This is an illustration of the widely known Gantt Progress Chart 
for keeping track of the progress of work. The chart here reproduced 
deals with progress in deliveries. The same method is used to watch 
production progress.] 

At the left of the chart is a list of articles to be procured. The 
amounts for which orders have been placed are shown in the column 
headed "Amount Ordered." The dates between which deliveries are 
to be made are shown by angles. The amount to be delivered each 
month is shown by a figure at the left side of the space assigned to 
that month. The figures at the right of each space indicate the total 
due at that date. 

If the amount due in any month is all received, a light line is 
drawn clear across the space representing that month. If only half 
the amount due is received, this fine only goes half way across. In 
general, the length of the light line indicates the amount delivered 
during that month. 

The heavy line shows cumulatively the amount delivered up to 
the date of the last entry. It will be noted that, if this line is drawn 
to the scale of the periods through which it passes, the distance from 
the end of the line to the current date will represent the amount of 
time deliveries are behind or ahead of the schedule. It is thus seen 

1 Adapted by permission from H. L. Gantt, "Organizing for Work," Industrial 
Management, LVIII (T919), 91. 



THE ADMINISTRATION OF PRODUCTION 



587 



that the short lines are the ones which require attention as they are 
farthest behind schedule. 

A, B, C, and D are summaries. 

A is a summary of the orders shown on the lower part of the chart. 



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588 BUSINESS ADMINISTRATION 

14. MEASURING AND COMMUNICATING AIDS: 
TIME STUDY 1 

Time study is the one element in scientific management beyond 
all others making possible the " transfer of skill from management to 
men." The nature of time study, however, is but imperfectly under- 
stood and it is therefore important to define it clearly. " Time study " 
consists of two broad divisions, first, analytical work, and second, 
constructive work. 

The analytical work of time study is as follows: 

a) Divide the work of a man performing any job into simple 
elementary movements. 

b) Pick out all useless movements and discard them. 

c) Study, one after another, just how each of several skilled 
workmen makes each elementary movement, and with the aid of a 
stop watch select the quickest and best method of making each 
elementary movement known in the trade. 

d) Describe, record, and index each elementary movement, with 
its proper time, so that it can be quickly found. 

e) Study and record the percentage which must be added to the 
actual working time of a good workman to cover unavoidable delays, 
interruptions, and minor accidents, etc. 

/) Study and record the percentage which must be added to cover 
the newness of a good workman to a job, the first few times that he 
does it. (This percentage is quite large on jobs made up of a large 
number of different elements composing a long sequence infrequently 
repeated. This factor grows smaller, however, as the work consists 
of a smaller number of different elements in a sequence that is more 
frequently repeated.) 

g) Study and record the percentage of time that must be allowed 
for rest, and the intervals at which the rest must be taken, in order 
to offset physical fatigue. 

The constructive work 0} time study is as follows: 

h) Add together into various groups such combinations of ele- 
mentary movements as are frequently used in the same sequence in 
the trade, and record and index these groups so that they can be 
readily found. 

1 Taken by permission from F. W. Taylor, " Discussion of Report of Committee 
on the Present State of the Art of Industrial Management," in Journal of American 
Society of Mechanical Engineers, XXXV (1913), 494-95. 



THE ADMINISTRATION OF PRODUCTION 589 

i) From these several records, it is comparatively easy to select 
the proper series of motions which should be used by a workman in 
making any particular article, and by summing the times of these 
movements, and adding proper percentage allowances, to find the 
proper time for doing almost any class of work. 

j) The analysis of a piece of work into its elements almost always 
reveals the fact that many of the conditions surrounding and accom- 
panying the work are defective; for instance, that improper tools are 
used, that the machines used in connection with it need perfecting, 
that the sanitary conditions are bad, etc. And knowledge so obtained 
leads frequently to constructive work of a high order, to the standardi- 
zation of tools and conditions, to the invention of superior methods 
and machines. 



See also p. 844 The Range of Time and Motion Study. 



15. MEASURING AND COMMUNICATING AIDS: 
MOTION STUDY 1 

[This is an account by F. W. Taylor of the work of Mr. Gilbreth 
in making a motion study of bricklaying. Such a motion study 
should, of course, be followed by time study and task-setting, in the 
Taylor philosophy.] 

He [Mr. Taylor] would briefly go through the study which Mr. 
Gilbreth made. He found himself standing on a scaffold with a pile 
of bricks on the floor and the mortar board alongside him, a brick 
wall being built on the left. The first motion made by a bricklayer 
was to take a step to the right. Was that step necessary? He 
would show later on that the step was not necessary. Next, after 
taking the step to the right, the bricklayer stooped down to the floor, 
disengaged a brick from the pile of bricks, and raised his body up 
again, either to full height or to partial height. Was it necessary for 
the bricklayer to lower a 240-pound weight to the floor in order to 
raise an 8-pound brick 2 J feet ? Mr. Gilbreth, after a great deal of 
work, devised a scaffold on which the bricks were placed at the same 
level with the wall, and kept at the same level at all times with the 
wall. It was a scaffold on which the man stood in one place, while a 
little table was placed alongside him on which the bricks and mortar 

1 Taken by permission from Transactions of the American Society of Mechani- 
cal Engineers, XXXII (1910), 787-88. 



590 BUSINESS ADMINISTRATION 

rested. That was a very simple invention, but why was it not done 
4,000 years ago, or why had it not been done in the meantime? 
Because no one had made a scientific motion study of the bricklayer. 
The bricks were placed on this supplementary platform at just the 
right height, so that the bricklayer merely turned round, picked up a 
brick with a rotary motion of the body and put it on the wall. Mr. 
Gilbreth then found that every bricklayer, as he raised the brick, 
threw it over in his hand at least one, sometimes two, sometimes three 
times. That was done for the purpose of examining whether the 
brick was sound and not chipped; he would not put a brick with 
a chip out of it on the outside of the wall where it showed. He 
therefore threw up the brick from habit, apparently just for the fun 
of it; he threw it up a second time to look at the edges, and sometimes 
a third time before he laid it on the wall. Mr. Gilbreth said, Was 
that necessary? and after a great deal of thought he devised the 
following plan for doing away with all of these motions. As the 
bricks were unloaded from the car or from the team, a laborer was 
stationed at a suitable bench, where the bricks were examined by 
him, and placed right side up, with the proper edge and the proper 
end on a wooden frame about 3 feet long; this frame held about 90 
pounds of bricks, and was so constructed that the bricklayer's hand 
went right into it and seized the brick without having to disengage 
it from the tangle on the floor. He took the brick out in the exact 
position in which it was to be laid in the wall, without any throwing 
and without any change of position. 

Mr. Gilbreth next found that the bricklayer worked with one 
hand only at a time. Why? Because the brick pile being on the 
floor and the mortar board some distance from it, they were too far 
apart for the man to take a dip of the mortar and pick up a brick at 
the same time; it took two motions. By building the scaffold in the 
way he had described, and by placing the bricks and the mortar close 
together, using a deep mortar box instead of a mortar board, brick 
pile and mortar box were brought within the range of the bricklayer's 
two eyes at the same time, so that he picked up a brick with the left 
hand, took a dip of mortar with the right hand with a single movement 
as far as time was concerned, then turned around, spread the mortar, 
and laid the brick in the wall. The step which was first taken by 
the bricklayer had been abolished, by reason of the fact that Mr. 
Gilbreth had studied in great detail the exact position which the feet 
of the workman should occupy with relation to the wall on the left 



THE ADMINISTRATION OF PRODUCTION 591 

and the brick and mortar on the right, in order to reach his brick pile 
and mortar with the greatest ease in the several different kinds of 
bricklaying. The workman, if he had his feet in the proper position, 
could move from one to the other without a step. The scaffold had 
been made adjustable, so that a cheap workman was able to walk all 
day long round the building and adjust the scaffold with the workmen 
on it to its new height, keeping the wall and the bricks and the work- 
man at all times at the proper height as they went along. The 
workman did not have to stop while the scaffold was adjusted. Mr. 
Gilbreth also found that all bricklayers, after they set the brick, 
tapped it down in order to get the joint the right thickness. From 
his experience in his youth Mr. Gilbreth knew that if the mortar was 
properly tempered it was possible to take the brick and press it with 
the hand to the right height. The mortar was therefore carefully 
tempered, so that the bricklayer could readily press the brick to the 
right height and thus save the time taken in tapping. 

He desired to summarize what had been done, because it was 
typical of what could be accomplished in every trade, without excep- 
tion. He did not say that as much as this could be accomplished in 
all cases, and yet it was typical of what could be done through motion 
and time study in every trade, provided sufficient attention was 
given to the subject. He believed it was three years before Mr. 
Gilbreth finally completed his motion study and obtained the full 
benefit from it, so that the motions of the bricklayer were reduced 
from eighteen to five, and in one case from eighteen to two. 

16. MEASURING AND COMMUNICATING AIDS: 
CLASSIFICATION AND SYMBOLS 1 

Classification is nothing more nor less than segregating those 
things with which we deal into like and unlike according to various 
bases — kind, purpose, use, effect, or what not. Necessarily dealing 
first with units, as investigation proceeds we are inevitably led, if 
progress is to be made, to a sifting and sorting and finally to a more 
or less logical grouping of these units upon a basis which will best 
serve our purpose. 

A classification should conform with the following requirements: 

First: It must be logical and utilitarian — founded on a basis 

proper to its effective use. If the object be to classify the various 

1 Adapted by permission from H. H. Farquhar, "Factory 'Nicknames' That 
Save Time," Factory, XXIII (1919), 50-53. 



592 BUSINESS ADMINISTRATION 

kinds of wood for the practical use of a paper manufacturer, for 
instance, who is primarily interested in length of fiber, one would 
not logically group first (or probably at all) by tensile strength or 
color, for there is no apparent relation between these characteristics 
and fiber length: if the classification is to be of most practical use to 
the architect, however, tensile strength and color would form primary 
subdivisions of the classification while the length of fiber would be of 
little or no concern. 

Second: It must proceed consistently from the general to the 
specific. In classifying different kinds of expense in the factory, for 
instance, it would be inconsistent to start first with, say, "wages," 
follow this next with those in the "machine shop," and then as the 
third groups have "direct" and "indirect" wages. A more logical, 
as well as practical, grouping would be first "machine shop" then 
"wages," the latter then being subdivided into "direct" and 
"indirect." 

Third: It must be capable of being indefinitely and consistently 
expanded. Plenty of "gaps" must be left for subsequent use. 

Fourth: It must be consistent in adherence to the particular 
basis and method used; in other words, it must possess continuity. 

Fifth: It must be inclusive up to the present state of knowledge. 

Proper classification and symbolization are as indispensable to 
real progress and scientific control in the industrial establishment as 
in the chemical laboratory. That this need is quite generally felt is 
evidenced by the rarity of a case where a plant is found which has 
not made some attempt along these lines. 

A symbol is simply a sign, letter, emblem, or character of some 
kind which is used to represent another, usually a longer, expression. 
After a given classification is determined upon, the next step is to 
assign to each component of the classification a symbol which will 
approximately represent it. The act of symbolizing then naturally 
succeeds and must logically conform to the classification. 

Since there is, however, almost no limit to the field from which 
symbols are chosen, it follows that the list of requirements to which 
a system of symbols must conform is unfortunately short. It is 
hoped, however, that there will be not a few who will agree with 
the writer that the following requirements should nearly all be raised 
to the "must" class: 

First: It must be definite and clear. One symbol must mean 
but one thing, and any one thing must have but one symbol. 



THE ADMINISTRATION OF PRODUCTION 593 

Second: It must be flexible for possible expansion of the classi- 
fication. 

Third: It preferably should be capable of being easily learned. 

Fourth: It preferably should be capable of being easily remem- 
bered — mnemonic and suggestive. Thanks to Berzelius we are 
not likely ever to forget that C stands for carbon, N for nitrogen 
P for phosphorus, and so on; how many of us, however, can picture 
or reproduce from memory the hieroglyph which the almanac tells 
us stands for Aries, Taurus, or Gemini; Mercury, Venus, or Earth? 

Fifth: It preferably should be as brief as is consistent with 
defmiteness. And since the object of brevity is the saving of time, 
this requirement emphasizes the fourth one above (easily remembered) 
in that time may not be unnecessarily lost in repeated reference to 
the key. 

Sixth: It preferably should be as simple as is consistent with 
defmiteness and clearness. It is not only more mnemonic but 
also infinitely simpler to write C instead of the hieroglyph for carbon. 
It is, moreover, perfectly definite and perfectly clear. It may, 
on the other hand, be simple to write H65 for tenpenny wire nails, 
but it is neither definite, clear, nor mnemonic. 

Seventh : It preferably should be elastic. The rules for its formu- 
lation should not be so rigid as to make necessary the violation of 
any of the above requirements. 

Eighth: It preferably should be easily and consistently expanded. 
The degree of subdivision in the symbol should correspond exactly 
with the degree of subdivision of the corresponding group or item of 
classification; for this purpose I consider letters are better than 
figures, as there are 26 letters but only 9 numerals available for use 
in any one position. 

Ninth: It preferably should be as foolproof as it is possible to 
make it. It should be difficult to make and easy to catch mistakes 
in the writing and interpretation of symbols. Thus if we use both 
capital letters and numerals in our symbol system, we must omit 
the letters I, O, Q, and preferably U, because when written hurriedly 
by hand they are extremely likely to be mistaken for numerals 1, 
zero, 2, and the letter V, respectively. 

Tenth: It preferably should enable (or at least materially facili- 
tate) a broad view and grasp of the whole subject dealt with. In 
other words, it must be simple, easily grasped and retained, and on a 
utilitarian basis. This reflects back to and emphasizes several of the 
above points. 



594 



BUSINESS ADMINISTRATION 



Many different systems of symbolization are in use today, some 
of which are fairly comprehensive while others are simply unconnected 
makeshifts. It is not necessary to describe all these in detail, but the 
most common fall under one of the following broad bases of symboli- 
zation: 

i. Composed entirely of numbers 

A. By the use of whole numbers 

B. By the use of decimals 

C. By the use of fractions 

D. By the use of decimals and fractions 

2. Composed entirely of letters 

A. By the use of capital letters 

B. By the use of small letters 

C. By the use of capital and small letters 

3. Composed of numbers and letters 

DECIMAL AND MNEMONIC SYMBOLIZATION OF SAMPLE ACCOUNTS 



Name of Account 






Main Account "SgSgjg" 


Class 
of Expense 


Decimal Mnemonic 
Symbol Symbol 


Selling 




300 








|c 


Direct 














Manufacturing 




400 








D 


Assembling Dept 






410 






DA 


Foundry 






420 






DF 


Machine Shop 


Miscellaneous labor and expense 

Building repairs 

Retainers (idleness) 

Furniture repairs 

Machine or work place repairs 

Inspection expense 

Power transmission repairs 

Reclamation of errors 

All other expenses 

Stores and supplies 
Trucking expense 
Wages and salaries 
Cleaning expense 




430 


43i 
432 
433 
434 
435 
436 
437 
438 
439 


439- 1 
439 2 

439-3 
439-4 


DM 
DMA 
DMB 
DME 
DMF 
DMM 
DMN 
DMP 
DMR 
14 let- 
ters 
still 
avail- 
able 
DMS 
DMT 
DMW 
DWZ 


Pattern shop 






440 






DP 


Forge 






450 






DR 


Product 




500 








EtoW 


Stores 




600 








s 


Machinery — Capital 




700 








Y 


Land and Buildings — Capital 




800 








Z 



See also p. 

P- 
P> 



197. 
221. 

333- 



Job Analysis. 

Some Aspects of Rating Scales. 

Measuring Aids May Result 

Standards. 



in Expense 



THE ADMINISTRATION OF PRODUCTION 595 

17. MEASURING AND COMMUNICATING AIDS: 
COST-ACCOUNTING 

A. THE DISTRIBUTION OF EXPENSE 1 

The underlying idea of all methods of expense distribution or 
apportionment is to use some one or more of the visible, tangible, 
measurable elements as. a gauge, and to prorate the expense allotment 
by it. That is, they burden each job or each unit of product in pro- 
portion to the material that goes into it, or the wages paid for it, or 
the time spent working on it, or the use it makes of the machines and 
other facilities in the factory. This gives us five cardinal methods of 
expense distribution: by material, by percentage on wages, by man 
hours, by machine rates, and by production factors. We will take 
up their operation and their characteristics successively. 

Distribution of expense by material is a method of limited applica- 
bility. Its usefulness is confined to comparatively simple industries 
such as metallurgical or structural material works, where the product 
is nearly or quite uniform. In a brick yard, or a blast furnace plant, 
or a gas works, or perhaps in a pipe foundry or other establishments 
of like character, it may work as well as any other plan, simply because 
there is no need of distribution, properly speaking, but only of equal 
subdivision. Indeed, if the product of a plant is absolutely homo- 
geneous — all just alike — it makes no difference whether you apportion 
expense by count, or weight, or measure, or flat cost — you cannot 
get wrong as between one unit and another. 

The percentage-on-wages method of apportioning factory expense 
is probably the most generally used. As a starting-point in this 
method, we take the total for a given time (say a month or a year) 
first of the wages of the productive labor during that period, and 
second of the factory expense during the same period, and we find what 
is the percentage relation of the expense to these wages paid to pro- 
ductive labor. Suppose we find that the total factory expense is 
60 per cent of the direct labor pay-roll; then we load every job 
done during the period with 60 cents additional for each dollar of direct 
wages that is expended upon it. If we find, for instance, that a cer- 
tain small steam pump is shown by the job ticket to have cost $50 for 
material and $100 for labor, we add 60 per cent of $100, or another 
$60, for the factory burden, and obtain as the shop cost of the product 
$50 plus $100 plus $60 equals $210. 

1 Adapted by permission from C. B. Going, Principles of Industrial Engineer- 
ing, pp. 97-102. (McGraw-Hill Book Company, 191 1.) 



596 BUSINESS ADMINISTRATION 

If our output is all substantially of the one general class, and if 
the various machines, tools, or pieces of apparatus in our manufactur- 
ing plant are not very different one from another as to expense of 
operation, and if our wages are fairly uniform as between one opera- 
tive and another, the results obtained by this method will be quite 
accurate. But if we have a great difference in equipment, having 
some very small machines taking little room and power, and cheaply 
operated, and some very large machines taking up a great deal of 
room and power, and involving large expense for operation and 
wages; if we have passing through the shop some very heavy work 
and some very small and light work; if some of our labor is highly 
paid and some is very cheap — this method may lead to very inaccurate 
results. 

The third method is the man-hour plan. It varies from the pre- 
ceding system in that the distribution is made proportionate to the 
time worked on each job instead of to the money paid for that time. 
At the first glance this might seem like the same thing, but on further 
consideration it will become evident that there are important 
differences. For example, suppose we take a job away from a $3-a- 
day man, and give it experimentally to a good clever $i.5o-a-day 
helper who completes it in the same number of hours that his prede- 
cessor did. Under the man-hour plan it will still carry the same 
expense burden as it did before, because it takes the same time. 
This is a correct result, for the mere change of operative has not 
changed in any way the demand which the work makes upon the 
general organization and facilities of the plant; has not changed in 
any way the amount of expense it creates, and hence should not change 
the expense apportioned to it. 

In some particulars, therefore, the man-hour plan is more correct 
than the percentage-on-wages plan, but when we look a little farther 
we find that, like the percentage-on-wages plan, it takes no cognizance 
of the machine element. All jobs taking two hours are burdened 
the same, whether the two hours' time is on a valve-seat grinder or on 
the largest engine-bed planer in the shop. 

The machine-hour method of expense distribution makes a much 
closer approach to accuracy than either of those so far described, 
because it recognizes the fact that in modern manufacturing the pro- 
ducing unit is not a single individual, but a complex combination 
of the machine or piece of apparatus, the man or men tending this 
machine, the equipment surrounding the machine, and the suitably 



THE ADMINISTRATION OF PRODUCTION 597 

prepared space necessary for the installation and operation of the 
machine. In further explanation of this method of expense distribu- 
tion the term " machine" is used in a general sense, with the under- 
standing that it includes anything from a soap kettle to a jeweler's 
lathe. 

In the administration of the machine-hour method of apportioning 
factory expense, the preliminary step is to determine on an hourly 
basis the cost of running each machine in the works. This cost 
includes the charge for rental, lighting, and heating of the space the 
machine occupies, and the surrounding space necessary for its opera- 
tion; interest on the cost of the machine and allowance for repairs and 
depreciation; cost of power to run the machine; cost of services, such 
as cranage and transportation of various kinds to feed or to remove 
materials; cost of indirect labor attendant upon the machine; any 
incidental or special expenses; and a just proportion of the general 
burden of administration, superintendence, non-productive factory 
labor, etc. 

Having obtained the totals of these various charges for a month or 
a year, they are divided by the number of hours during that time the 
machine can be expected to run, this figure being reached by a careful 
study of past experience and if necessary corrected by later actual 
observation. The quotient is the hourly rate of that machine. 
Every job coming to the machine is then assessed with this charge 
for the number of hours or fraction of an hour it spends on the machine. 

Evidently, if each machine in the plant is thus rated, and each 
job coming to each machine is thus assessed with its individual expense 
burden, and if all the machines are in operation during the normal 
and expected portion of the time, the whole expense burden would 
be distributed in close accordance with the use each job has made of 
the facilities of the shop. This seems as fair a basis as could be found. 
The trouble begins when the activity of the plant differs largely from 
normal. The machine rates then distribute too much or not enough 
to cover the actual expense, according as the plant is running overfull 
or is partly idle. 

B. TJIE SERVICES OF COST-ACCOUNTING 1 

Through the aid of accurate information concerning costs the 
proprietor or administrative officer is enabled to keep in close touch 

1 Adapted by permission from J. R. Wildman, Principles of Cost Accounting, 
pp. 2-4. (The William J. Hewitt Press, 1911.) 



598 BUSINESS ADMINISTRATION 

with conditions, shape the operating policy of the future, and guide 
the operations as they mature. 
He is enabled: 

a) To determine which lines of production or merchandise are 
profitable and which are unprofitable; to institute methods for 
extending and increasing the sale of such lines as are profitable and 
to retard the sale of, or withdraw entirely from the manufacture, or 
sale of, such lines as are unprofitable; to decide intelligently the lines 
on which commissions may be allowed to salesmen and the extent of 
such commissions. 

b) To reduce costs; either through a reduction of the elements 
composing costs, or through an increase in the production. 

c) To allocate "leaks" and stop unnecessary waste or ex- 
travagance. 

d) To develop the highest type of productive efficiency. To 
bolster up the weak points and harmonize the work of the different 
departments, or operating groups. 

e) To gauge the efficiency of managers, relatively speaking, by 
comparing one manager with another. The manager, whose cost of 
producing soil pipe per ton is $7.00, is obviously not as efficient or 
capable as the man who under precisely similar conditions can pro- 
duce the same product at a cost of $5.00 per ton. 

/) To compare the work of similar foremen, departments, 
machines, operatives, or other centers of production. 

g) To compare costs in general of one period with another. 

h) To compare actual costs with estimated or predetermined 
costs. The tendency today is toward standardization. 

Modern business organization has become so complex as to have 
passed beyond the limits of individual observation, unless the individ- 
ual has some artificial means of transcending these limits. The time 
has passed when the administrative officer can be in touch with all the 
details of the business. Cost statistics offer such a man a means of 
transcending his individual limits. They afford him an opportunity 
of having placed before him at stated intervals a picture, as it were, 
of his business operations. The administrative officer, or proprietor, 
draws his conclusions from the picture, and is afforded thereby a 
basis on which to found his judgment as to future operations and 
policies. 



THE ADMINISTRATION OF PRODUCTION 



599 




600 BUSINESS ADMINISTRATION 

C. THE BASIS OP MANUFACTURING COSTS 1 

Inasmuch as the cost of an article is the means by which the 
economy of its production is measured, proper costs may assist 
materially in producing economy of production if the cost system is 
devised with the idea in mind that this is to be its primary function. 
In order that it may perform such a function, the results must be 
available at once to the executive in immediate charge. Moreover, 
all items of expense that do not contribute to production must be 
eliminated from the cost and presented in another form. 

To operate a cost system, we must realize that all the expenses of a 
manufacturing business may be divided into three classes, as follows: 
(i) the expense of buying and storing the raw material (this expense 
must be added to the cost of the material before it is delivered to 
the factory, and not put on the product as a manufacturing expense) ; 
(2) the expense of marketing the finished product; (3) the expense of 
operating the factory, which is further divided as follows: expense 
which does not contribute to production; expense which does so 
contribute. 

The last item is the only one with which we are concerned in the 
determination of manufacturing costs. 

While there is undoubtedly one most correct way of determining 
these costs, we must recognize that all such methods are more or less 
approximate, and therefore no one can be considered perfect. The 
attempt to get absolutely exact costs has led to no end of complica- 
tions, often with the result that the reason for obtaining the cost 
was entirely lost sight of in the desire for accuracy. The most 
important fact, therefore, is that we shall not include in manufacturing 
costs the items that do not contribute to production. 

Let us suppose that a manufacturer owns three identical plants of 
an economical operating size, manufacturing the same article — one 
located in Albany, one in Buffalo, and one in Chicago — and that they 
are all running at their normal capacity and managed equally well. 
The amount of indirect expense per unit of product would be sub- 
stantially the same in each of these factories, as would be the total 
cost. Now suppose that business suddenly falls off to one-third of its 
previous amount and that the manufacturer shuts down the plants in 

1 Adapted by permission from H. L. Gantt, "The Basis of Manufacturing 
Costs," Industrial Management, LIII (1917), 369-70. and "The Relation between 
Production and Costs," The Journal oj 'the American Society of Mechanical Engineers, 
XXXVII (1915), 467. 



THE ADMINISTRATION OF PRODUCTION 601 

Albany and Buffalo and continues to run the one in Chicago exactly 
as it has been run before. The product from the Chicago plant 
would have the same cost that it previously had, but the expense of 
carrying two idle factories might be so great as to take all the profits 
out of the business; in other words, the profit made from the Chicago 
plant might be offset entirely by the loss made by the Albany and 
Buffalo plants. 

If these plants, instead of being in different cities, were located in 
the same city, a similar condition might also exist in which the expense 
of the two idle plants would be such a drain on the business that they 
would offset the profit made in the going plant. 

Instead of considering these three factories to be in different 
parts of one city, they might be considered as being within the same 
yard, which would not change the conditions. Finally, we might 
consider that the walls between these factories were taken down and 
that the three factories were turned into one plant, the output of 
which had been reduced to one-third of its normal volume. Arguing 
as before it would be proper to charge to this product only one-third 
of the indirect expense charged when the factory was running full. 

If the foregoing argument is correct, we may state the following 
general principle: The indirect expense chargeable to the output of a 
factory bears the same ratio to the indirect expense necessary to run the 
factory at normal capacity, as the output in question bears to the normal 
output of the factory. 

This theory of expense distribution, which was forced upon us by 
the abrupt change in conditions brought on by the war, explains 
many things which were inexplicable under the older theory, and 
gives the manufacturer uniform costs as long as the methods of manu- 
facture do not change. 

Under this method of distributing expense there will be a certain 
amount of undistributed expense remaining whenever the factory runs 
below its normal capacity. A careful consideration of this item will 
show that it is not chargeable to the product made, but is a business 
expense incurred on account of our maintaining a certain portion of 
the factory idle, and chargeable to profit and loss. Many manu- 
facturers have made money in a small plant, then built a large plant 
and lost money for years afterward, without quite understanding 
how it happened. This method of figuring gives a clear explanation 
of that fact and warns us to do everything possible to increase the effi- 
ciency of the plant we have, rather than to increase its size. 



602 BUSINESS ADMINISTRATION 

This theory explains clearly why some of our large combinations 
of manufacturing plants have not been as successful as was anticipated, 
and why the small but newer plant is able to compete successfully 
and make money, while the combinations are only just holding 
their own. 

The idea so prevalent a few years ago that in the industrial world 
money is the most powerful factor, and that if we only had enough 
money nothing else would matter very much, is beginning to lose its 
force, for it is becoming clear that the size of a business is not so impor- 
tant as the policy by which it is directed. If we base our policy on the 
idea that the cost of an article can only legitimately include the 
expense necessarily incurred either directly or indirectly in producing 
it, we shall find that our costs are much lower than we thought, and 
that we can do many things which under the old method of figuring 
appeared suicidal. 

The view of costs so largely held, namely, that the product of a 
factory, however small, must bear the total expense, however large, is 
responsible for much of the confusion about costs and hence leads 
to unsound business policies. Of course a method of accounting does 
not diminish the expense, but it may show us where the expense 
properly belongs and give us a more correct understanding of our 
business. 

18. THE CONTROL OF LARGE vs. SMALL-SCALE 

INDUSTRIES 

A. A PROTEST AGAINST TOO GREAT CENTRALIZATION 1 

Many of you have undoubtedly had more or less opportunity to 
observe the deplorable inefficiency of most of our large industrial 
concerns, especially those commonly known as trusts, where a number 
of formerly independent plants have been united under one common 
management. The plants are usually scattered over a considerable 
area and the central offices located in some commercial center. 

The first step in the organization of these corporations has 
usually been the removal of the resident owners and managers from 
the various localities to the central offices and the subsequent attempt 
to carry on the functions of management by the superintendent and 
heads of departments. These men, in most instances, not having 
had any real knowledge of manufacturing costs and profits, are, of 

Adapted by permission from R. B. Wolf, "Individuality in Industry," Bulletin 
of the Society to Promote the Science of Management, Vol. I (1915), pp. 2-3. 



THE ADMINISTRATION OF PRODUCTION 603 

course, incapable of conducting the business intelligently. It there- 
fore becomes necessary for the central office to perform much of this 
work for the various plants. 

A central purchasing department has undoubtedly many advan- 
tages, but as ordinarily conducted in large corporations these 
advantages are almost entirely offset by the obstacles placed in the way 
of free choice on the part of the mill organizations and the conse- 
quent discouragement of individuality in making selections. The 
impossibility of handling all of the purchases by one capable man 
necessitates delegating a lot of minor purchases to subordinates, 
who have no real knowledge of actual mill requirements. Even 
though they know what is required in one mill, they cannot know in 
others where conditions are not the same. 

The purchasing agent should have full power to build up an 
efficient organization for keeping informed of the market conditions, 
so that requisitions from the mills can be handled with promptness 
and dispatch. The department should be able to furnish full com- 
plete information to the individual plants whenever they need it in 
order to properly purchase supplies. It should encourage the mills to 
furnish specifications and welcome attempts on their part to keep 
comparative records for the purpose of determining the best materials 
to use. It should always conduct itself toward each separate organi- 
zation as if it were an outside firm, employed to give advice and 
assistance in every way possible to enable purchases to be made 
economically. Each plant should receive frequent reports from the 
purchasing department, giving complete information about materials 
found to be giving good results in other places. This one feature 
alone would make it immensely valuable to the parent-corporation. 

Let us take accounting next. Why are accounts kept and what 
is their purpose? In the last analysis, accounts are records of the 
progress of accomplishment and are used to enable those in charge 
of the corporation's affairs to decide upon the future policy to 
pursue. 

Why, then, should any attempt be made by the central office to 
keep accounts that are of strictly local interest to the individual 
plants? And why even attempt to dictate how and when these 
accounts should be kept ? In so far as comparisons between indi- 
vidual plants are concerned this is justified, but no further, and 
even in this case it should not be pushed to a point where compari- 
sons which local conditions at the plants demand are not allowed. 



604 BUSINESS ADMINISTRATION 

The foregoing should not be misconstrued to mean that I believe 
a central accounting system for corporations is not necessary or 
desirable, for it most certainly is. The accounting department 
should confine itself, however, to such accounting as is of inter- 
plant nature and not attempt to dip into local conditions, except in 
an advisory capacity. 

The selling, in most cases, can be handled by the central office 
much better than any other function; indeed, the main purpose in 
forming large corporations was primarily to stop ruinous competition 
between plants, especially in periods of slight demand. There should, 
however, be much closer touch between the selling department and 
the mills and a much more intimate knowledge of operating conditions 
by the salesmen. The degree of this intimacy is, of course, one of the 
important things to be decided by the chief executive. 

" Maintenance and construction" is another thing which should 
be touched upon. There is usually much damage done to the indi- 
vidual plants by decisions of "absentee" engineers, whose knowledge 
of the plant conditions cannot be of such an intimate nature that 
they can make intelligent decisions. This very often actually retards 
progress in the organization and serves to discourage individual 
effort upon the part of the local mill management. 

A high-grade consulting engineer employed to devote his entire 
time to the corporation's affairs would be a very valuable asset. He 
should conduct himself toward each individual plant exactly as he 
would if they were all independent establishments and his own 
clients. There would be this very important difference, however, 
which would mean much greater freedom of action, i.e., he would be 
entirely free to give each plant the benefit of his experience in others, 
and in this way would be a constant, highly intelligent means of 
exchanging ideas of mutual interest and benefit. 

I make a plea for the development of plant individuality. This 
is not merely a return to old conditions existing prior to amalgamation 
but a regaining of all the advantages of the old order of things with 
the additional advantages of the new. 

B. THE SMALL-SHOP BASIS OF PRODUCTION 1 

Leadership "carries" better in the small industry. The pro- 
prietor's personality and enthusiasm can lay hold upon twenty-five 

1 Adapted by permission from G. H. Haynes, " The Small Industry in a Democ- 
racy," The Journal of the American Society of Mechanical Engineers, XL (1918), 535. 



THE ADMINISTRATION OF PRODUCTION 605 

or fifty men, whereas to a force of five hundred he would be simply 
"the boss." Esprit de corps and morals are of natural growth in the 
small shop; they are hard to develop and maintain where there is no 
human contact between the employer and the workmen and where the 
workmen are not personally known to one another. In the small 
shop there can be brought home to the individual workman the direct 
interest which he has in maintaining both the quantity and the quality 
of the product; he can be brought to see clearly how his own work is 
discredited and his own wage lowered in consequence of the soldiering 
or waste of material by any member of the working force. It goes 
without saying that the mutual understanding between employer 
and employees in a small industry is a strong influence in lessening 
the frequency and the seriousness of labor controversies. 

In fact, the advantages of the small shop are so obvious that in 
these days of giant corporations some of the most interesting and 
promising experiments in industrial management are in the attempts 
to reorganize production "on the small-shop basis," assigning to a 
superintendent and small force of men the making of a particular 
part or the completion of a certain series of processes in turning out 
the finished product. 



See also p. 705. -Relative Importance of the Main Forms of the 
Business Unit, 
p. 600. The Basis of Manufacturing Costs. 
P- 533 • Technological Industry is Frequently Large-Scale- 
Industry. 



19. SOME ORGANIZATION CHARTS 1 

[It is well to be clear concerning what an organization chart is. 
It is not organization itself; it is not even a picture of that organiza- 
tion. At the most, it is a picture of certain aspects of an organiza- 
tion, usually of lines of authority and sometimes of lines of 
communication. It shows nothing of what is most vital of all, the 
spirit and vigor of the organization. The accompanying charts are 
accordingly useful primarily in hinting at the relationships of the 
different parts of the businesses concerned.] 

Taken by permission from articles by S. H. Bullard, L. V. Estes, and Norman 
Howard in Industrial Management, LIX (1920), 58-9, 492, and LX (1920), 442. 



6o6 



BUSINESS ADMINISTRATION 



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6o8 



BUSINESS ADMINISTRATION 



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C. Scientific Shop Management 



In the foregoing sections we have seen the background of modern 
production and what is involved in production control. There 
remains a survey of that outlook on production control which is called 
scientific management. This term is used in both a broad and a 
restricted sense. It has been broadly applied to all attempts to 
establish, by scientific methods, standards of performance and 
policies and mechanisms of control. Thus interpreted there is little 
forward-looking management that may not be included in the term. 
In a more restricted sense it refers to the "Taylor System," as that 
has been developed by F. W. Taylor and a small, devoted group of 
followers. Since the Taylor System is the most highly developed of 
all so-called scientific management, it has seemed best (aside from the 
historical introduction presented in Selection 20) to arrange our 
selections so that they bear mainly upon that system. 



THE ADMINISTRATION OF PRODUCTION 609 

PROBLEMS 

1. Write out a paragraph showing that the scientific management move- 
ment (Taylor began his work in the 1880's) is related to the trust move- 
ment and to the revolution in marketing methods. 

2. Review Section C (pp. 153-92) of the chapter on the administration of 
personnel, noticing particularly the questions on page 162. How do 
you account for the fact that the earlier writings of the "efficiency 
movement " were in the field of wage payment ? 

3. "Some of the wage systems are merely modes of payment. Others are 
philosophies of management." Explain. 

4. Precisely what do you conceive Taylor's contribution to have been ? 

5. "Was there no planning in industry prior to the advent of the Taylor 
Planning room ? Of course there was." What is the real significance 
of the use of the planning room ? 

6. What is meant by calling the Taylor plan "functional management" ? 
Can you draw an organization chart of the Taylor plan? Is such a 
chart essential ? 

7. Does the separation of "planning" from "doing" mean that less 
skilful workers are likely to be in demand ? 

8. "The Taylor System seeks to restore individual responsibility in 
industry." Do you agree ? What are the devices used ? 

9. "The Taylor scheme is just a further development of specialization. 
Still further responsibilities are taken away from the worker, and 
management is also further specialized to enable it to assume these 
responsibilities." Comment. 

10. What are the advantages of functional foremanship? Has it dis- 
advantages? Is it the essence of the Taylor plan? Do you under- 
stand that every business is to have eight foremen ? 

11. It has been charged that the standardization required under the 
Taylor plan hinders progress. What things require standardization 
under this plan? Is such standardization essential or merely desir- 
able ? Will it hinder progress ? 

12. Do you agree that the method of Taylor management is the method of 
a true science ? 

13. "It is of the essence of the Taylor plan that there should be precise 
prediction." What are the prerequisites of precise prediction ? 

14. Notice the organization chart illustrating unsystematized management 
(p. 622). What defects in control are indicated by this chart? 

15. Many strong and wealthy business organizations grew up in the period 
of unsystematized management. Does this fact nullify the claims of 
the Taylor plan ? 

16. Compare Selections 9 and 23. Are they dealing with the same things ? 
Are they contradictory ? 



610 BUSINESS ADMINISTRATION 

17. Take the reading on "The Control of Manufacture under the Taylor 
System" (p. 624) and think out what items would have to appear on 
the balance of stores sheets; on the balance of work sheets. What 
are the risks of waste if these balance sheets are not kept ? 

18. "The one word which characterizes the Taylor plan is prevision." 
Do you agree ? 

19. "The Taylor plan is useful for only certain types of industry." Do 
you agree ? Even if you do not agree, what types do you suppose the 
writer had in mind ? 

20. Notice that Hathaway lists "the general plan of organization" as the 
first problem to attack in installing the Taylor plan (see p. 633). Why ? 

21. Notice how far down in the list he puts time study. Why? 

22. "The Taylor plan should always be a development rather than an 
installation in a plant." Why or why not ? 

23. "Scientific management substitutes the rule of natural law for arbi- 
trary decisions of foremen and employers." How is this natural law 
obtained ? Why are trade unionists so generally opposed to scientific 
management if it operates as the quotation indicates ? 

24. Give arguments for and against the position that scientific management 
democratizes industry. What does it matter, anyhow ? 

25. "Scientific management makes trade unions and trade union regulations 
unnecessary as a protection to the workers." Do you agree ? 



20. THE BEGINNINGS OF SCIENTIFIC MANAGEMENT 1 

[In various places in this volume we have caught glimpses of the 
forces which along about 1880 conspired to bring in a new order of 
economic phenomena (see especially pp. 153-59, 178, 256-62). 
This present selection, written in 191 2 when the efficiency movement 
and scientific management were just beginning to attract widespread 
popular attention, will be found to be a useful addition to these 
glimpses.] 

The history of the efficiency movement is like that of many another 
extension of knowledge, whether physical or mental. It is a record 
of independent partial contributions of discovery or interpretation, 
which later are found to be all interrelated parts of one great, har- 
monious and comprehensive whole. 

■Adapted by permission from C. B. Going, "The Efficiency Movement," 
Transactions of the Efficiency Society, I (1912), 11-17. 



THE ADMINISTRATION OF PRODUCTION 6ll 

Taking only the larger manifestations of this faith, we may identify 
distinctly at least seven which have come into being and have gathered 
force and volume within approximately the last century — some of 
them, indeed, within the last generation and a few within the last 
decade. 

The first is the profession of engineering, which has grown up from 
the root idea of efficiency in the use of power and mechanical effort, 
and has carried this vitalizing principle into every branch into which 
it has expanded. 

The second is the conservation movement, seeking to prevent 
hitherto reckless waste in the use of natural resources and the funda- 
mental materials of industry. 

The third is fire prevention, which looks toward better protection 
from a special form of waste of structures, equipment, and manu- 
factured products. 

Fourth, we find the propagandism of general hygiene and its 
extension into the wider sphere of eugenics, adapting the theory of 
conservation and the ideals of waste-prevention to the individual 
human unit and to the race at large. 

Fifth comes welfare work and the effort toward reduction of 
industrial accidents — a manifestation differing distinctly in scope 
from general hygiene, and addressing its effort toward a particular 
class and a specialized purpose. 

Sixth, in scientific management (using the term in a broadly 
descriptive sense, and not the narrow titular one in which it has some- 
times been monopolized) we find generically the same concept, 
worked out into concrete policies and methods intended to raise the 
efficiency of processes and the prevention of waste in production, 
supervised or secured by human toil. 

Seventh, less manifestly but no less truly, earnest prosecution 
of cost study and analysis, which leaped so strikingly into notice 
less than twenty years ago, is part of the same impulse — a potentially 
and then actively constructive application of effort toward efficiency 
in the realm of money. 

To this group of seven distinctive manifestations of a single impel- 
ling idea in seven different fields should perhaps be added an eighth — 
the movement toward greater efficiency in government. 

It is only in the field of application and in the elements or facts 
to which the effort is applied that these several movements differ. 
The essentia] concept or energizing ideal is always the same. It is 



612 BUSINESS ADMINISTRATION 

the elimination of waste. It is the raising of the ratio of useful result 
to effort expended. It is the bringing up of actual performance as 
near as possible to the level of a reasonable and equitable standard. 

What might be called a self-conscious attempt at the improvement 
of industrial efficiency was specifically expressed in the literature and 
thought of the subject by occasional contributions dating back to 
the first half of the nineteenth century, although no wel] -informed 
wave appeared until about a quarter of a century ago. Perhaps it 
would be truer to say that there were two waves of thought, starting 
at different points of the horizon but converging and gradually 
coalescing. 

The first of these impulses was originally analytical and was 
addressed to the careful, critical examination of costs, with a purpose 
of discovering the elements of expense and reducing them to basic 
units, so that one cost could be compared accurately, intelligently, 
and usefully with another. This is of course vitally necessary to 
the determination of standards, and on the fixation of standards 
depends the measurement of efficiency. The literature of cost study 
did not become prominent until about 1896, but from that date on it 
increased rapidly in volume and in intensity and definiteness of 
interest. 

The second impulse was primarily constructive and addressed to 
individual situations with the purpose of reducing existing costs, 
whatever they might be, sometimes without very definite vision of 
either absolute, attainable standards, or of the relative importance 
of the factors attacked; but always with confidence that progress 
toward better things could be made, and would be made if any factor 
in the expense formula were diminished. For that was the under- 
lying purpose in the earlier wage systems, and in the work of the 
sincere systematizers, who did much good, however many crimes 
may have been committed in the same name by later and less genuine 
disciples. 

These agencies rapidly developed into the more complete, better 
balanced, and earnestly considered policies of comprehensive control 
of which so-called "scientific management" is the most widely 
known example. 

In a rapid review of this modern constructive movement for the 
betterment of industrial efficiency, the first efforts (first, at least, if 
we follow the order of public announcement) centered upon the 
workman, as the man most familiar with the conditions and possi- 



THE ADMINISTRATION OF PRODUCTION 613 

bilities of every operation, and took the form of offering an induce- 
ment to him to increase his output by a better use of his knowledge, 
skill, and the facilities, supplied. These measures were proposed in 
Mr. Henry R. Towne's "Gain Sharing," and reduced to more specific 
and practical methods in the Halsey premium plan, published in 189 1, 
and in the Rowan, Ross, and other forms of premium payment which 
are substantially modifications of Halsey's idea. 

While these measures were dictated by a sincere attempt to pro- 
mote efficiency, they had faults of two opposite kinds. First, as the 
only element directly acted upon was the worker, many inefficiencies 
might still remain uncorrected in materials, machinery, processes, 
distribution, and sequence of work, or other matters. Second, in 
the temptation of increased earnings, with no accurate determination 
of a standard method or task, a worker might be stimulated to over- 
exertion. 

Five years later, in 1896, Frederick W. Taylor presented the differ- 
ential piece-rate method,' in which there is to be found a definite sug- 
gestion of organized methods designed to check both these tendencies, 
while still retaining the incentive of reward for high performance. It 
is scarcely more, than a suggestion. The only specific institution pro- 
posed is a rate-fixing department, replacing by careful and thorough 
study the somewhat haphazard methods of setting standards by the 
judgment (or guess) of a foreman or minor official. The working 
conditions, upkeep of machinery and tools, dispatching and routing 
of jobs, etc., are broadly referred to as details in which the manage- 
ment should co-operate; but the prime force in the system is repeat- 
edly stated to be the desire inspired in the worker to obtain the larger 
wages paid for accomplishment of the established task. 

Five or six years later another important advance toward full 
recognition of the necessities for efficient working appeared in H. L. 
Gantt's paper on "Task and Bonus" (1901), supplemented by his 
second paper on "Graphical Daily Balance" (1903), both presented 
to the American Society of Mechanical Engineers. These formulated 
a complete scheme of management involving the use of scientific 
principles. In addition to the careful, thoroughly informed study 
of the operation and of the best way of performing it, there now 
appeared the added elements of printed scheduled instruction cards, 
and of deliberately appointed instructors, showing the workers how 
to perform the task. The method of payment, while it retained the 
bonus award to the successful task-worker, no longer penalized the 



6 14 BUSINESS ADMINISTRATION 

worker who tried but failed. He was still protected in the ruling day- 
rate of his class. 

Immediately thereafter, also in 1903, came Frederick W. Taylor's 
classical contribution on Shop Management, in which all the foregoing 
elements were embodied and incorporated with still more advanced 
ideas of scientific control of manufacturing operations. Much more 
attention was given to elementary time study as a basis for scientific 
time setting. Most striking of all, a new form of organization was 
proposed. All work was first separated into the two great functions 
of planning and execution. Each of these functions again was sub- 
divided into four. Functional organization instead of fractional 
was proposed as the efficient means of performing all work in the 
most efficient manner. 

About five years later yet came two contributions of unequal 
importance but both significant. The first was the suggestion, by 
Charles U. Carpenter, of the committee system, characteristic of a 
school of thought which I have elsewhere called the "school of sug- 
gestions" because it depends chiefly upon creating an attitude of 
mind in the managing officials. The second was Harrington Emer- 
son's proposal of the "efficiency system," defined first in his book 
Efficiency as a Basis of Operation and Wages, and amplified in The 
Twelve Principles of Efficiency. 

Mr. Emerson, like the specialists who preceded him, accepted 
most of the elements of scientific operation already recognized, as, 
for example, time study, task setting, standardized methods and 
standard instructions, dispatching and schedules of work. He recog- 
nized fully also the necessity of functional as well as fractional dis- 
tribution of duty in any efficient organization. Instead, however, 
of the functional foremanship advocated by Taylor, Emerson adopted 
the model of line and staff furnished by the Prussian military organi- 
zation, which was so triumphantly successful in 1870-71. 

More important, however, than any institutional forms or measures 
advocated was Emerson's recognition of efficiency as a universal ideal 
— his identification of the agitation going on in industrial fields as part 
of something world-wide, indeed, universe-wide — as part of a great 
awakening to the sinfulness of waste, and of a struggle toward better 
utilization of the materials and forces supplied by an infinitely 
efficient nature. 

Efficiency, therefore, is a concept immeasurably larger, vastly 
wider, and more general in its relations and applications, than scientific 



THE ADMINISTRATION OF PRODUCTION 615 

management, which is often mistakenly used as if it were a synony- 
mous term. Scientific management is one mode of promoting effi- 
ciency in one class of situations. The Taylor System is the most 
highly developed, most completely institutional, and therefore most 
closely specialized form of scientific management. 

21. SCIENTIFIC MANAGEMENT IN PRODUCTION 



Mr. Taylor insists that the general principles, or philosophy, of 
scientific management should not be confused with the mechanism, 
which is merely incidental. He emphasizes four fundamental prin- 
ciples. First, the method of scientific management is the method of a 
true science. The organizing engineer "objectifies" a plant to be or- 
ganized; he enters as an " outsider," bound by no traditions and preju- 
dices of its management, holds it, so to speak, at arm's length, studies 
it by departments and as a whole, compares it with other similar 
plants of his experience, and observes defects that the "insider" does 
not see. In this process the truly scientific method of analysis into 
units and experimental recombination of them is followed, not super- 
ficially but exhaustively, until enough data are collected from which 
trustworthy laws may be derived. 

A second general principle of scientific management is that there 
should be, and as a result of the laws derived by observation and 
experiment may be, a scientific selection of machines, material, and 
workmen. 

The third principle of the new management is that a workman 
once discovered and assigned to the performance of the function to 
which he is adapted, the management should provide continuous 
instruction for him. 

The fourth of Mr. Taylor's principles of scientific management 
is that there should be intimate co-operation between management 
and men and a redistribution of responsibilities. The workability 
of the new management, says Mr. Taylor, depends upon such sym- 
pathetic co-operation. There must be mutual recognition of the 
possibility of mutual helpfulness. This recognized, there must be a 
readjustment of duties, for under present systems of management 

1 Adapted by permission from H. S. Person, "Scientific Management," Pro- 
ceedings of Tuck School Conference (191 2), pp. 4-5, and "Scientific Management," 
Bulletin of the Taylor Society, II (1916), 17-19. 



616 BUSINESS ADMINISTRATION 

there is required of a workman so much as to make impossible his 
highest efficiency. The manager, under the present system, requires 
of the workman simply the accomplishment of a certain result. To 
the workman is left the determination of the methods as well as the 
actual performance. Under scientific management the experts in the 
planning room determine the method and leave to the workman 
freedom to apply all his energy to actual performance. 

These four general principles constitute, according to Mr. Taylor, 
the philosophy of scientific management. The devices employed to 
give effect to these principles constitute the mechanism. 

Aims, plans, policies and methods as they concern productive 
processes. As I analyze it, there are three principal aims in it: 
(i) seeking of more precise information through investigation, experi- 
ment, etc.; (2) as great an amount of prediction of what is going to 
happen in business operation as is possible on the basis of the unusual 
amount of exact information acquired; (3) precise control of the 
processes of conducting the business by various functionalized people 
in such wise as to bring about as precisely as possible the predictions 
which have been made on the basis of the exact information required. 

1. Seeking of more precise information. It is in the scientific- 
management plant that investigation and experiment — the establish- 
ing of an experiment room with adequate equipment under the 
direction of capable investigators — have been worked out. It is 
in connection with this investigation anc experimentation that time 
study has come in. I cite it as a method of acquiring precise informa- 
tion. Time study simply means a method of acquiring exact informa- 
tion with respect to the time which it takes a person to do a certain 
thing, with certain definite equipment, under certain definite condi- 
tions. 

2. Precise prediction. If one by time study and other investiga- 
tion has secured and filed information telling the time of performing a 
unit operation with certain tools and materials under certain condi- 
tions, then if an order comes in to do or make something which 
represents a combination of these unit operations, by a simple mathe- 
matical calculation it is possible to determine how long it will take to 
fill the order, what materials and tools must be provided, what condi- 
tions established, when work on each part should begin, when and 
how they should be assembled, etc. In other words, an accurate 
layout of work on the job becomes possible. In most plants layout 
is by guess. Guess involves waste. An accurate layout of separate 



THE ADMINISTRATION OF PRODUCTION 617 

jobs means accurate layout and dovetailing of all jobs, and economical 
and efficient operation of materials, equipment and labor; in other 
words, more precise control. 

3. Precise control. This means that to each of a number of 
persons shall be assigned, with authority, the responsibility of main- 
taining one or more of the standard conditions on the basis of which 
the prediction or layout of a job is made. The principal standard 
conditions to be maintained are: (See p. 555.) 

a) Standard materials. 

b) Standard storing and issuing of materials. 

c) Standard conditions under which work is performed. 

d) Standard methods of performing operations. 

Through what machinery are the three primary aims of scientific 
management (investigation, prediction, precise control) accomplished ? 
This machinery is described in the words functional organization. 

Functional organization is carried out to an unusual degree in 
manufacturing plants by scientific management. First, there is 
functional organization in large; planning is separated entirely from 
doing. Now, in an ordinary manufacturing plant an order is received 
to make something. That is sent down to the foreman with an order 
to "make twenty-five of these by the 25th of June." The foreman 
turns to the workman and says, "start on these day after tomorrow." 
There your foreman has planned who is to do it; how long it will 
take; how it is to be done; and so on. Under scientific management, 
on the other hand, in a room called the planning room, where is kept 
on file all the information which has been gathered regarding all 
phases of operation, the planning is done. First, a list is made of the 
operations involved in filling this order, and of the materials and 
equipment required; second, an estimate is made of the time it takes 
to do each one of the operations with due allowance for uncertainties; 
third, a day is determined when work on the order is to start in order 
to meet the date of promised delivery. All planning of that sort is 
done, and proper orders are made out. On the proper date these 
orders are issued to the man who has charge of the material, telling 
him to send it to such and such a machine; and to the workman at 
that machine, telling him to start the work. Accompanying the 
order issued him is the analysis of the job and definite instructions for 
its performance. 

I have been speaking about functional organization in the large — 
separation of performing, planning and investigating. There is also 



618 BUSINESS ADMINISTRATION 

functional organization in detail. [The following is one illustration 
of functional organization in detail.] 

B 1 

Let us go over the duties which [an old-fashioned] foreman in 
charge, say, of lathes, or planes, is called upon to perform, and note 
the knowledge and qualities which they call for. 

He must be a good machinist; must be able to read drawings 
readily; he must plan ahead and see that the right jigs, clamps, 
and appliances, as well as proper cutting-tools are on hand, and are 
used to set the work correctly in the machine and cut the metal at the 
right speed and feed; must see that each man keeps his machine 
clean and in good order; must see that each man turns out work of 
the proper quality; must see that the men under him work steadily 
and fast; must constantly look ahead over the whole field of work 
and see that the parts go to the machines in their proper sequence 
and that the right job gets to each machine; must, at least in a gen- 
eral way, supervise the time-keeping and fix piecework rates; must 
discipline the men under him, and readjust their wages. 

Under functional management, the old-fashioned single foreman 
is superseded by eight different men, each of whom has his own special 
duties, and these men, acting as the agents for the planning depart- 
ment, are the expert teachers, who are at all times in the shop helping 
and directing the workmen. Being each one chosen for his knowledge 
and personal skill in his specialty, they are able not only to tell the 
workman what he should do, but in case of necessity they do the 
work themselves in the presence of the workman, so as to show him 
not only the best but also the quickest methods. 

The following is a brief description of the duties of the four types 
of executive functional bosses which the writer has found it profitable 
to use in the active work of the shop: (i) gang bosses, (2) speed 
bosses, (3) inspectors, and (4) repair bosses. 

The gang boss has charge of the preparation of all work up to the 
time that the piece is set in the machine. It is his duty to see that 
every man under him has at all times at least one piece of work 
ahead at his machine, with all the jigs, templets, drawings, driving 
mechanism, sling chains, etc., ready to go into his machine as soon 

1 Adapted by permission from F. W. Taylor, Shop Management, pp. 96-98, and 
The Principles of Scientific Management, pp. 100-125. (Harper and Brothers, 
copyright by author, 191 1.) 



THE ADMINISTRATION OF PRODUCTION 619 

as the piece he is actually working on is done. The gang boss must 
show his men how to set their work in their machines in the quickest 
time and see that they do it. He is responsible for the work being 
accurately and quickly set, and should be not only able to but willing 
to pitch in himself and show the men how to set the work in record 
time. 

The speed boss must see that the proper cutting tools are used for 
each piece of work, that the work is properly driven, that the cuts are 
started in the right part of the piece, and that the best speeds and 
feeds and depth of cut are used. His work begins only after the 
piece is in the lather or planer, and ends when the actual machining 
ends. The speed boss must not only advise men how best to do this 
work, but he must see that they do it in the quickest time, and that 
they use the speeds and feeds and depth of cut as directed on the 
instruction card. In many cases he is called upon to demonstrate 
that the work can be done in the specified time by doing it himself 
in the presence of his men. 

The inspector is responsible for the quality of the work and both 
the workmen and speed bosses must see that the work is all finished 
to suit him. This man can, of course, do his work best if he is a 
master of the art of finishing work both well and quickly. 

The repair boss sees that each workman keeps his machine clean, 
free from rust and scratches, and that he oils it and treats it properly, 
and that all of the standards established for the care and maintenance 
of the machines and their accessories are rigidly maintained, such as 
care of belts and shifters, cleanliness of floor around machines and 
orderly piling and disposition of work. 

The following is an outline of the duties of the functional bosses 
who are located in the planning room, and who in their various 
functions represent the department in its connection with the men. 
The first three of these send their directions to and receive their 
returns from the men, mainly in writing. These four representatives 
of the planning department are the (1) order of work and route 
clerk, (2) instruction card clerk, (3) time and cost clerk, and (4) shop 
disciplinarian. 

Order of work and route clerk. — Af ter the route clerk in the planning 
department has laid out the exact route which each piece of work is 
to travel through the shop from machine to machine in order that it 
may be finished at the time it is needed for assembling, and the work 
done in the most economical way, the order of work clerk daily writes 



620 BUSINESS ADMINISTRATION 

lists instructing the workmen and also all of the executive shop bosses 
as to the exact order in which the work is to be done by each class of 
machines or men, and these lists constitute the chief means for 
directing the workmen in this particular function. 

Instruction card clerks. — The "instruction card," as its name 
indicates, is the chief means employed by the planning department 

DIAGRAM ILLUSTRATING THE PRINCIPLE OF FUNCTIONAL OR 
SCIENTIFIC MANAGEMENT* 
r 



PLANNING 



PERFORMING 




for instructing both the executive bosses and men in all of the details 
of their work. This instruction card is filled in by one or more 
members of the planning department, according to the nature and 
complication of the instructions, and bears the same relation to the 
planning room that the drawing does to the drafting room. 

Time and cost clerk. — This man sends to the men through the 
"time ticket" all the information they need for recording their time 

1 This diagram is taken by permission from F. B. Gilbreth, "Units, Methods, 
and Devices of Measurement under Scientific Management," Journal of Political 
Economy, XXI (1913), 619. 



THE ADMINISTRATION OF PRODUCTION 621 

and the cost of the work, and secures proper returns from them. 
He refers these for entry to the cost and time record clerks in the 
planning room. 

Shop disciplinarian. — In case of insubordination or impudence, 
repeated failure to do their duty, lateness or unexcused absence, the 
shop disciplinarian takes the workmen or bosses in hand, applies 
the proper remedy. He sees that a complete record of each man's 
virtues and defects is kept. This man should also have much to do 
with readjusting the wages of the workmen. At the very least, he 
should invariably be consulted before any change is made. One of 
his important functions should be that of peace-maker. 

22. STAGES IN MANAGEMENT 1 

All types of management seem to fall into three general classes, 
which for want of a better terminology we shall call (1) unsystema- 
tized, (2) systematized, and (3) scientific. 

Let us look briefly at the five important features of every manu- 
facturing plant, excluding designing, advertising, and selling. These 
are: (1) accounting and costs; (2) purchasing; (3) storage of mate- 
rials; (4) execution of the work; and (5) efficiency of the worker. 
[This selection will be confined to the discussion of the execution of 
the work. — Ed.] 

Execution of work.- — Orders in the unsystematized shop are 
recorded in a simple manner, sometimes even received and trans- 
mitted orally by the salesman. These are described in part orally 
to the superintendent, who may further enlighten the foreman on any 
of the details of such orders. It is assumed that the superintendent 
knows his business, that the foremen know theirs, and a workman is 
expected to sense what is wanted and to ask questions when he is 
not sure. In this way an attempt is made to fill in the exact and 
accurate information which the selling end either has not secured or 
has not transmitted in writing. 

The "single foremanship" plan prevails where one foreman 
handles as many men as he can. The number of men and the amount 
of work he can look out for is limited by the amount of detail he can 
carry in his head and by his physical and nervous endurance. He 
gives work to each workman when the latter has finished his last job, 
and depends largely on the worker's knowledge of what to do and 

1 Adapted by permission from H. P. Kendall, " Systematized and Scientific 
Management," Journal of Political Economy, XXI (1913), 593-614. 



622 



BUSINESS ADMINISTRATION 



how to do it. As questions arise in the progress of the work, or where 
the written order is incomplete, the workman goes to the foreman who 
in turn goes to the office for instructions. Meanwhile progress on 
the work stops. 

The workman goes for and selects his tools and appliances, and 
does his work in the way in which he is accustomed to do that par- 
ticular kind of work. A difference in method of doing the same kind 



ORGANIZATION CHART ILLUSTRATING UNSYSTEMATIZED 

MANAGEMENT 



PRESIDENT 



VICE-PRESIDENT 



SECRETARY 



TREASURER 




Purchasing Agent 
Sales Manager 
Bookkeeper 
Order Clerk 
Cost Clerk 
Chief Engineer 



Production Clerk 
Stores Keeper 
Foremen 
Time Keeper 
Inspector 
Shipping Clerk 



of work by different workmen and in different shops is often quite 
marked. 

In the systematized plant, this crude rule-of-thumb method has 
been changed. A complete set of order-cards for recording and trans- 
mitting orders is in use. The worker receives a written order for the 
work he is to do. But this seldom takes the form of an instruction 
card giving him complete information for every move and every tool. 
It is likely to say what the work is, assuming that he will do it in a 
satisfactory manner. Workers almost always record their time for 
each job on a card, which registers the labor cost accurately. They 
do not always register the time lost in securing tools, materials, and 
further instructions. The planning of a job, except in plants where 



THE ADMINISTRATION OF PRODUCTION 623 

the work is very largely repetition, is likely to be done as the work 
proceeds. Piecework is used wherever possible and is considered the 
most economical way of performing a given operation. It is the aim 
of most systematized plants to secure as much piecework as possible. 
This may be unfair for different kinds of work to both employees and 
employer. 

Systematized management keeps things running smoothly, avoids 
most of the mistakes due to the lax methods of unsystematized man- 
agement, and turns out a good product. But a lack of centralized 
planning and centralized control of the workers causes loss of effi- 
ciency. This is especially true in rush times, or when certain parts 
of a factory are congested. It is impossible, then, with the means 
at hand, so to plan the work as to get it out to the best advantage; 
for with the foreman of one room or department planning his work, 
and another his, the two can seldom be made to interlock perfectly. 

The theory of the proper execution of work under scientific man- 
agement is that it should be planned completely before a single move 
is made — that a route-sheet which will show the names and order of 
all the operations which are to be performed should be made out and 
that instruction cards should be clearly written for each operation. 
Requisitions on the stores department showing the kind and quality 
of the materials and where they should be moved, and lists of proper 
tools for doing the work in the best way, should be made up for each 
operation. Then by time-study the very best methods and appa- 
ratus for performing each operation is determined in advance and 
becomes a part of the instruction cards. 

By this means the order, and assignment of all work, or routing, 
as it is called, should be conducted by the central planning or routing 
department. This brings the control of all operations in the plant, 
the progress and order of the work, back to the central point. Infor- 
mation which even in the systematized plant is supposed to be fur- 
nished by the knowledge of the workman or the gang-boss or foreman 
is brought back to the planning room and becomes a part of the 
instruction card. 

Under scientific management the efficiency of the worker and 
machine depends on five other conditions, after assuming that the 
parts of the management which have to do with purchasing, storage 
of materials, etc., are well performed. These conditions are: (1) 
analysis and synthesis of the elements of operation; (2) scientific 



624 BUSINESS ADMINISTRATION 

selection of the worker; (3) training of the worker; (4) proper tools 
and equipment; (5) proper incentive. All these conditions it is the 
duty of the management to provide. 



See also p. 374. Purchase and Stores under Unsystematized, 
Systematized, and Scientific Management. 



23. CONTROL OF MANUFACTURE UNDER THE 
TAYLOR SYSTEM 1 

The production of anything consists of three stages : 

a) Determining what is to be produced — what materials are to be 
used and their disposition in the article to be produced. This is the 
function of the engineering or designing department. 

b) Determining how it is to be produced and when the various 
steps incident to its production are to be taken. This is the function 
of the planning department. 

c) Performing the physical work in accordance with the plans of 
the designing and planning departments. This is the function of the 
manufacturing department. 

Obviously the planning department is the logical complement of 
the engineering or designing department. Briefly stated its functions 
are so to plan and control the processes of production that the per- 
sonnel and the facilities of the plant, physical and financial, will be 
utilized to the best and fullest advantage, that the work will be done 
correctly and economically and that deliveries will be made on time. 

In the planning department is assembled practically all of the 
clerical work which in a plant run under old style management is 
done here and there in the manufacturing departments, either by 
clerks, the foremen or even the workmen themselves. It is the 
repository of all data and working records required for the planning 
and control of work done in the plant. 

The basic data required for the planning department should 
include : 

a) Data relating to product and materials. — Drawings and bills of 
materials of the product (or their equivalent which in some cases 
may take the form of samples or patterns). 

1 Adapted by permission from H. K. Hathaway, "On the Technique of Manu- 
facture," Annals of the American Academy of Political and Social Science, LXXXV 
(1919), t 49-55- 



THE ADMINISTRATION OF PRODUCTION 625 

Specifications for both the product and the materials entering 
thereinto. This class of data should cover all of the information 
with respect to the product that may be needed in planning or in its 
manufacture. 

b) Data relating to plant equipment. — Complete information with 
respect to each machine, its capacity, speeds, adjustments, classes of 
work or operations to which suited, location, etc. Similar data with 
respect to work places other than machines, tools and appliances, etc. 
This class of data should be so complete that work may be planned 
with a full knowledge of, and in accordance with the manufacturing 
facilities, in such a way as to make the best use of the plant and its 
equipment. 

c) Elementary time study data. — "Unit times" covering all of the 
elementary operations entering into the processes of manufacture, 
the adjustments and operation of machines, the use of the various 
tools and appliances, allowances for fatigue, for changing time cards 
upon the completion of each job, for inexperience of new operators, 
for variations in quantities, etc. In short, all of the data necessary 
to the compilation of detailed instruction cards for any operation to 
be performed, indicating the method to be followed and the time that 
the job should take under the standard conditions that have been 
established. 

There are also built up and maintained for products that have 
been manufactured, files of route charts or diagrams, route sheets, 
instruction cards and tool lists which will be described farther on. 

The active records of the planning department consist principally 
of the progress sheets (or charts) and the route sheets on which the 
progress on the various orders in process of manufacture is recorded 
and the "Balance of Stores and Worked Materials" sheets (stock 
ledgers or perpetual inventory) which show for each item of pur- 
chased or manufactured materials carried in stock, the quantity on 
hand, the quantity on order but not yet received in stores, the quantity 
required for (apportioned but not yet issued to) manufacturing 
orders or shipping orders that have been issued and the balance 
available for use on future orders. 

From this point perhaps it will be best to describe the processes 
that take place in the planning department from the time that a 
manufacturing order has been issued and the necessary drawings, 
bills of materials, specifications or samples provided, describing each 



626 BUSINESS ADMINISTRATION 

stage in the process of planning and the manner in which the work is 
controlled as it progresses through the shop. 

Routing and duties of the route clerk. — The manufacturing order 
together with all data relating to design, etc., is turned over to the 
route clerk who plans in detail for each unit or article to be produced 
for the manufacturing order: 

a) The quantities of each kind of material required for each 
different part. 

b) Whether these materials are to be taken from stock on hand in 
the store-room or procured especially for the order. 

c) Whether the part or article is something to be manufactured 
from material on hand or to be procured or is to be drawn from manu- 
factured stock on hand in the store-room. 

d) If the part or article is to be manufactured, the operations 
which must be performed in order to convert the primary material 
into the finished article, the sequence in which these operations 
must be taken up, the machine or work place best suited to the per- 
formance of each operation. 

If the product called for by the manufacturing order consists of a 
number of parts to be assembled together after having been manu- 
factured or drawn from the store-room, the route clerk prepares a 
diagram or route chart showing graphically the manner in which the 
various parts are to be assembled into groups or sub-assemblies and 
the manner in which the various groups or sub-assemblies are to be 
assembled to bring about the completed machine or article, the 
relation of the several parts and groups to each other, the relative 
importance of each part and group as a guide in determining the 
order in which the work should be prosecuted in the shop so as to 
have those parts requiring the greatest time to produce finished as 
nearly as possible simultaneously with all other parts. Likewise 
on the charts he shows all of the information previously described. 

For each unit to be manufactured, that is to say, for each part, 
for each group of parts to be assembled and for the assembling of the 
completed article, a route sheet is prepared giving the information 
above referred to in such a manner that the progress of the work may 
be recorded and regulated as it goes through the shop. He also 
causes to be prepared the orders on the store-room (stores issues) 
for the primary materials and stock parts. 

Based upon the route sheets there are prepared by typists all of 
the orders relating to each of the several operations on each piece 



THE ADMINISTRATION OF PRODUCTION 



627 



or assembled unit that will be required as the work progresses. 
These include: 

a) Move orders issued to men whose sole duty it is, on the orders 
of the planning department, to move materials from place to place in 
the shop. 

b) Time cards which are issued to the workmen at the start of 
each job and serve the purposes of recording progress of work on the 
route sheets, making up the pay-roll and of cost keeping. 

ROUTE CHART FOR SPECIAL VALVE 1 



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c) Operation orders to be used in planning the work ahead for 
each of the machines and work places throughout the shop serving 
as an index to the detailed instruction cards and tool lists relating to 
the respective operations, indicating the machine at which the work 
is to be done and the time which it should take. 

d) Inspection orders which are issued to the inspector, in some 
cases for each operation, advising him of the start of each job in 
order that he may give the workmen such instruction as may be 
necessary to insure a proper understanding of the requirements as 
to accuracy, quality, etc., and that he may check the work up as it 
progresses to guard against carelessness or errors. 

e) Identification tags to be attached to the various parts and 
materials. 

The route sheets are attached to portfolios or to sheets of heavy 
paper containing a series of envelopes in which the move orders, 

1 Adapted by permission from H. K. Hathaway, "Routing Considered as a 
Function of Up-to-Date Management," Industrial Management, LX (1920), 354. 



628 BUSINESS ADMINISTRATION 

time cards, operation orders, etc., referred to above and the instruc- 
tion cards and tool lists for the various operations are placed in such a 
manner as to be readily accessible when wanted. The route sheets 
with their portfolios are later placed in suitable files indexed to 
facilitate finding any sheet desired. 

The balance of stores clerk. — The next step in the planning is to 
send the manufacturing order accompanied by its route sheets, stores, 
and work materials, issues, etc., to the balance of stores clerk who 
will make sure that adequate provision has been made for the materials 
required either through their being on hand in the store-room or on 
order. He apportions to the order the quantities of each material 
required, subtracting it from the quantities shown to be available on 
the respective balance sheets, and as the balance available falls as a 
result of apportionment to the minimum quantity established he 
issues requisitions on the purchasing agent for purchased materials or 
issues manufacturing orders for manufactured or worked material 
parts. Thus the stock is automatically maintained. 

Later on as the material is actually withdrawn from the store- 
room the balance of stores clerk also subtracts from the quantity 
shown to be on hand the materials issued. 

The balance of stores clerk co-operates closely with the accounting 
department, his sheets carrying values as well as quantities are in 
fact details of the stores and manufactured product accounts. 

Time study and instruction card man. — The manufacturing order 
with its route sheets, etc., next is delivered to the time study and 
instruction card clerk whose duty it is to draw up for each operation 
an instruction card describing in detail just what the operation con- 
sists in, the method to be followed and the implements to be used, and 
to fill in for each one of the elementary operations making up the 
operation as a whole the time as shown by his elementary time study 
data. 

The time study man in preparing an instruction card must have 
readily available complete information relating to each of the machines 
in the shop, and what tools and implements are available. 

He must also have properly tabulated all of the elementary time 
units which may enter into work to be done. With this data and the 
drawings and specifications before him giving all of the information 
relating to the product to be worked upon, he prepares the instruction 
card for each operation enumerating every elementary step which he 
would take if he were to perform the operation himself. 



THE ADMINISTRATION OF PRODUCTION 629 

Simultaneously with preparing the instruction card which of 
course must indicate any implements to be used, a tool list specifying 
them is prepared, and should it be found that any new tools are 
required, the person preparing the instruction card must arrange for 
their purchase or manufacture. In short, the instruction card 
writer must assure himself that all of the conditions upon which he 
bases the method and time prescribed will exist when the work is 
undertaken. 

Of course, it is not necessary in every instance to prepare a new 
instruction card for each operation on each manufacturing order 
passing through the planning department. Many jobs, or parts of 
jobs, are simply repetitions for which instruction cards already exist. 

These cards show in summarized form the time for preparation 
at the start of the job, for cleaning up at the finish, the time per 
unit or piece, and the percentages of allowance for fatigue, inertia, 
etc., which may vary with the number of pieces in the lot. From this 
information the time for each operation is computed and entered on 
the time cards, operation orders and route sheets. 

The time study man and the route clerk must co-operate closely 
with each other. The time study man is also frequently consulted 
by the designing department and in fact in many businesses no new 
article is added to the line until it has been submitted to the time 
study man and the cost determined on a basis of his figures as to the 
amount of work involved. Until active co-operation is established 
between the planning department and the designing department of a 
business it may be said that the full benefits of scientific manage- 
ment are not realized. 

With the placing of the completed route sheets together with their 
operation orders, time cards, instruction orders, tags to be attached 
to the material for identification, etc., in the route files the work of 
planning what is to be done may be said to be completed and we now 
enter into the second stage of the planning department's activities — 
the planning of when work is to be done. 

This is carried on by the production clerk (sometimes called pro- 
duction superintendent or production manager) with certain assistants 
known as the planning department order of work clerk and the shop 
order of work clerk. 

It is the function of the production clerk to see that work is com- 
pleted in such time as to satisfy the needs of the sales department or 
in the case of stock parts, the needs of the shop. It is also his duty 



630 BUSINESS ADMINISTRATION 

to see that all machines and work places in the shop are adequately 
supplied with work and continuously employed. This the produc- 
tion clerk does by maintaining what is termed a ''balance of work" 
showing the amount of work of each class ahead of the shop, sub- 
divided by classes of machines or operations and further by time 
periods. This is kept up by adding the time represented by manu- 
facturing orders as they are entered, and subtracting as the work is 
performed. 

The production clerk arranges the "order of work" or schedule 
indicating the order of preference to be given to each of the various 
manufacturing orders started out. This schedule must of course 
take into account the amount of work to be done and the time when 
the order must be finished. It serves as a guide to the planning 
department order of work clerk in arranging for the progress of an 
order through the various stages of planning and also for the shop 
order of work clerk in starting orders out in the shop and in laying 
out the work ahead for each of the machines and work places. The 
production clerk must each day check up the progress being made on 
the various manufacturing orders going through the planning depart- 
ment and in the shop to assure himself that his assistants are cor- 
rectly following out his instructions. He must also take care of the 
exceptional or emergency orders coming in from time to time and 
instruct his assistants as to the action to be taken where things have 
not worked out as planned. 

The planning department order of work clerk. — While strictly 
speaking the planning department has no one person at its head, that 
is, in the sense of the old time boss of a department, the planning 
department order of work clerk may in a certain measure be regarded 
as being its head. He is responsible for work proceeding through the 
planning department without delay, for the work of each of the 
functions being kept up to date and in case of any failure to do so it 
lies with him to initiate and follow up such action as may be necessary 
to correct the trouble. Naturally he cannot be responsible for the 
quality of the work done by the route clerk or the time study man nor 
give them orders as to how work shall be planned, but he is responsible 
for seeing that these and all other functions in the planning depart- 
ment are adequately manned and that the personnel attend to 
business. 

He must indicate to each of the people in the planning department 
the order in which they are to undertake the work ahead of them and 



THE ADMINISTRATION OF PRODUCTION 631 

he must advise them as to the time when each order must be com- 
pleted so far as their respective part of the planning is concerned. 
He must maintain such records as will enable him at any time to 
locate any order that is going through the planning department and 
he must see that orders move from one planning function to another 
without delay. In addition to the follow up manufacturing orders 
going through the planning department, he must also look after the 
planning for the correction of any damaged or defective work reported 
by the inspectors as well as for the planning of any changes in 
work already in process. 

Shop order of work clerk. — The shop order of work clerk really 
controls the operation of the shop, the mechanism through which 
he does this being the bulletin board, and the route files. He has 
as assistants, the window clerk, who receives time cards, move orders 
and inspection orders as work progresses and issues to the workmen, 
movemen and inspectors these orders for their next jobs; the recording 
clerk, who upon receipt of a time card, move order or inspection 
order pertaining to work that has been done indicates the progress 
by checking on the appropriate route sheet, removes the operation 
order for finished work from the bulletin board, issues through the 
window clerk the time cards for jobs to be started, the move orders for 
jobs that have been finished and inspected, inspection orders for jobs 
started, etc. He also has an assistant generally termed the messenger, 
who delivers to workmen the drawings, specifications, samples or other 
information as well as instruction cards and tool lists pertaining to 
work ahead. 

On starting an order out in the shop, the shop order of work clerk 
arranges the operation orders for the first operations (on the parts for 
which material is available) on the bulletin board for the machines 
or work places concerned, in the order indicated by his order of work or 
schedule, with respect to other jobs already ahead of machines, or 
work places in question. He also sees that the moving of materials as 
well as the work of the inspectors is controlled in accordance with the 
order of work and kept up to date. As jobs progress from one opera- 
tion to another he arranges on the bulletin board, the operation 
orders for each successive step in accordance with the order of work. 

Another important duty of the shop order of work clerk is to 
check up or to follow up through the route sheets the progress of work 
on all manufacturing orders, assuring himself that they are progressing 
at such a rate as will insure their completion in their proper order and 



632 



BUSINESS ADMINISTRATION 



by the time required; to bring to light any cases where the lack of 
materials or tools have prevented the progress of work, and above 
all to detect any cases where through error delays have occurred, 
or where the operation orders for work have not been arranged on 
the bulletin board in accordance with the order of work. In every 
instance where he finds any condition which is not right he must 
initiate and follow up the necessary action to correct the trouble. 




Planning Department Bulletin Board 1 

For each machine or work place in the shop there are three pairs of hooks. The " 1st hooks" 
hold the operation order for the job in progress stamped with the time started; under it is hung a 
slip or tag giving the name of the operator and showing the machines he is qualified to run or classes 
of work he can do. If the machine is idle a slip of distinctive color and wording showing the reason 
such as "No operator," "Operator absent," "Machine under repair," etc., is placed on the "1st 
hooks." The "2nd hooks" hold the planning department copies of operation orders for jobs ready 
to be done — for which the materials have been moved to the machine or work place — or into an 
adjacent storage space or "truck station" serving a group. The "3rd hooks" hold operation orders 
for jobs ahead not yet ready to be done — i.e., having preceding operations yet to be performed or 
waiting for materials to be issued. 

Another form of bulletin board has "pockets" or compartments taking the place of hooks. 
Both are developments of Mr. Taylor's and Mr. Barth's. 



He is responsible for seeing that each machine or work place is 
kept properly supplied with work and for bringing to the attention 
of the production clerk any case where there is an excess or a shortage. 
In cases of break-downs of machinery or anything going wrong he 

Adapted by permission from H. K. Hathaway, "Routing Considered as a 
Function of Up-to-Date Management," Industrial Management, LX (1920), 284. 



THE ADMINISTRATION OF PRODUCTION 633 

must see that whatever action may be necessary is taken to correct the 
trouble. 



See also p. 565. The Control Problem Varies with Different Types 
of Industry, 
p. 354. An Organization of the Sales Department. 



24. STEPS IN INSTALLING THE TAYLOR SYSTEM 1 

A logical course of installation would be somewhat along the 
following lines: 

1. General plan of organization, designing departments and sub- 
divisions thereof, defining authority, the nature, scope and limitations 
of their activities and the relations and responsibilities of each depart- 
ment to others. Such a plan, with its mnemonic classification, also 
serves as a basis for a model accounting and cost system, for a classi- 
fied file of "standing orders" (a handbook) governing all manner of 
duties, activities and transactions. 

Of course, a change cannot be affected all at once from the hap- 
hazard organization to the new, even though all parties might concede 
its desirability. It must be brought about gradually in order to 
avoid friction or confusion. Nevertheless from the start it is highly 
desirable to have a plan which may be regarded as an ideal toward 
which we should work. 

2. Plan for physical rearrangement of departments and equipment, 
including provision of space for new departments and in accordance 
with the prospective general plan of organization. This should result 
in lowered cost for supervision, better utilization of space, economy 
in tools, cheaper handling, etc. An ideal plan of rearrangement 
must be brought about step by step extending over a long period of 
time and only as the installation of the new scheme of management 
progresses. 

The advantages resulting from common services such as repair, 
tool room, drafting department, storeroom, cost-keeping and time- 
keeping will be so obvious as to require no further comment. 

3. The collection and codification of data relating to the products. 
In machine-shop work this consists in improving the draughting 
practice along lines that will facilitate planning and performance of 

Adapted by permission from H. K. Hathaway, "Logical Steps in Installing 
the Taylor System of Management," Industrial Management, LX (1920), 93-96. 



634 BUSINESS ADMINISTRATION 

work and provide safeguards against mistakes. In lines other than 
those which commonly work from drawings these data take the form 
of specifications, working samples, gages, etc. It is surprising to find 
that in many plants data relating to products are either incomplete, 
inaccurate or existing only in the heads or personal notebooks of the 
employees. Even in machine shops and similar industries where 
drawings and bills of materials are supposed to be complete and 
satisfactory, they will usually be found to fall far short of what is 
required under scientific management. 

While this is being done, that part of the mnemonic classification 
relating to products should be worked up, at least so far as the main- 
classes are concerned. This will be needed later in connection with 
routing, filing of data and instructions, store-keeping and cost- 
keeping. 

4. The collection and codification of data relating to machinery and 
other plant equipment. This should cover all such information relating 
to equipment as may be needed for purposes of standardization of 
machines, tools, etc., for planning work in advance, for establishing 
machine rates and for maintenance purposes. That part of the 
mnemonic classification relating to plant equipment should be 
worked up. 

5. Standardization of machines and development of maintenance 
system? 

6. Standardization of tools and establishment of tool-room. 1 

7. The development of the stores system. This should cover on the 
one hand physical arrangement of storeroom, methods of storages, 
centralization of administrative control and all other phases of store- 
room operation for both purchased and manufactured materials, the 
former commonly being called " stores" and the latter " worked 
materials stores." On the other hand, it should cover the establish- 
ment of balance of stores and balance of worked material sheets and 
their operation as a function of the planning department. This 
involves working up that portion of the mnemonic classification 
covering purchased and worked materials carried in stores and the 
determination of "minimum" and "ordering" quantities for each 
article. 

Together with this must be made such modification in the pur- 
chasing system, receiving materials, the auditing and vouchering of 

1 In many cases this work may only be done in a preliminary way to be further 
developed as a result of time study. 



THE ADMINISTRATION OF PRODUCTION 635 

accounts payable for materials, as may be necessary to make these 
activities fit in with the stores system and the later development of 
other features of the new scheme of management. 

8. Development of the order system. The system and forms for 
handling shipping orders (orders from customers) must be revised 
to fit in with the stores system, providing for the apportionment of 
stock products and as a result thereof the issue of manufacturing 
orders or purchase orders for the replenishment of stock or the pro- 
curement or manufacture of products not carried in stock. 

A system of manufacturing orders must be established or the 
existing one modified so that it will fit in with the stores system, 
enabling apportionment in advance to each manufacturing order, of 
the purchased or worked materials required,, thus insuring their being 
provided for and on hand when wanted, and the stock of each article 
replenished at proper intervals. All work done must be authorized 
by manufacturing orders, and pending the establishment of the 
routing system and the mechanism for the administration of the order 
of work function, some temporary plan for keeping track of and 
recording progress should be provided in order that control (the order 
of work function) may be exercised, while still imperfectly, better 
than may previously have been possible. Existing mechanism, forms, 
etc., may often be made to serve until such time as the more permanent 
scheme may be worked out and put into effect, thus making the 
change less radical or abrupt. Whatever may be done along these 
lines should be so worked out and planned as to meet the new require- 
ments of all other functions such as cost-keeping, accounting, plan- 
ning, purchasing, etc., as they may be developed and installed. 

9. The time-keeping system must be so modified as to serve all of 
the purposes of accounting such as cost-keeping, pay-roll and analysis 
of indirect expenses, and in addition thereto provide the necessary 
data for employees' records, records of idle machine time, and above 
all automatically to provide the up-to-the-minute information that 
will be needed by the planning department in recording progress of 
work on manufacturing orders and for the operation of the mechanism 
through which the order-of-work function is exercised. 

10. The routing system, including the complete planning in advance 
of the work to be done in turning out the product called for by each 
manufacturing order issued and the provision of the various forms, 
etc., used in putting the work so planned through the plant. 



636 BUSINESS ADMINISTRATION 

11. The establishment and use of the mechanism for follow-up and 
control of work in progress, order-of-work function in its complete detail 
comprising " bulletin boards" for the planning department and shop, 
operation orders, inspection orders, move orders, the means for their 
issue and return and route sheets and progress sheets to control their 
use and record each successive step in the accomplishment of work 
planned. At this stage would also be started the " balance of work" 
and other activities having as their object the fullest possible utili- 
zation of plant facilities and equalization of temporary overloading 
in certain quarters. Usually about this time the need for co-operative 
effort along new lines by the sales department becomes evident. 

At about this stage in our work, although it may have been found 
desirable to have done so sooner, the functional foreman known as 
the gang boss and the inspector should be inaugurated. The gang 
boss to look after preparation for each successive job and see that the 
order of work is followed and the inspector to give such instruction 
and supervision as may be required in the matter of quality. 

12. Time study, the improvement and standardization of methods 
and the inauguration of a pay system based thereon involving the 
payment of a suitable reward for the accomplishment of a given 
production under standard conditions in a given time logically should 
be taken up now that a proper foundation has been built for them. 
Unfortunately this is where in the past too many efforts to apply and 
profit by Taylor's teachings have commenced and have consequently 
either ended in failure or have fallen far short of the desired results. 

As a result of time study, the work of standardization of tools, 
machinery, etc., started early in the installation will be carried much 
farther. 

At this stage the functional foreman known as the instructor 
should be established. It is his duty to teach the methods developed 
and prescribed by the planning department, giving special attention 
and assistance to the less skilled and less experienced workers. This 
is the function which Mr. Taylor in Shop Management refers to as the 
"speed boss." 

13. Cost and accounting system. The stores system, the time- 
keeping system, the manufacturing order system and the routing 
system have all been developed in such a way as to lend themselves 
to the requirements of cost-keeping and accounting, serving not only 
the purposes of planning, control, etc., but supplying the basic data 
in readily usable form for the analysis and distribution of indirect 



THE ADMINISTRATION OF PRODUCTION 637 

expenses for obtaining promptly and with a minimum of effort the 
cost of each lot of product in as great detail as may be desired and the 
determination of the profits or losses on each month's business as 
incurred and on each class of product. The establishment of the cost 
system is, therefore, at this stage relatively easy. Such changes as 
may be necessary in the general books and the system of keeping 
them must also be made to connect them up with the rest of the 
system. 



25. SCIENTIFIC MANAGEMENT AND LABOR 1 

A. THE CLAIMS OF SCIENTIFIC MANAGEMENT 

Fundamental principles of scientific management. — Scientific man- 
agement rests on the fundamental economic principles that harmony 
of interests exists between employers and workers, and that high 
general wages and better general conditions of employment can be 
secured through low labor cost. 

The relation of scientific management to fact and law. — Scientific 
management attempts to substitute in the relations between employers 
and workers the government of fact and law for the rule of force and 
opinion. It substitutes exact knowledge for guesswork and seeks to 
establish a code of natural laws equally binding upon employers and 
workmen. 

The scientific and democratic character of scientific management. — 
Scientific management is thus at once scientific and democratic. In 
time and motion study it has discovered and developed an accurate 
scientific method by which the great mass of laws governing the 
easiest and most productive movements of men are registered. 
These laws constitute a great code which for the first time in industry 
completely controls the acts of the management as well as those of the 
workmen. It pays men rather than positions and through its methods 
of payment makes possible the rewarding of each workman on the 
basis of his efficiency. It makes possible the scientific selection of 
workmen, i.e., the mutual adaptation of the task and the worker, 
and is a practical system of vocational guidance and training. It 
analyzes the operations of industry into their natural parts, makes 
careful studies of fatigue, and sets the task on the basis of a large 
number of performances by men of different capacities and with 
due and scientific allowance for the human factor and legitimate 

1 Adapted by permission from R. F. Hoxie, Scientific Management and Labor, 
pp. 8-19. (D. Appleton and Company, 1916.) 



638 BUSINESS ADMINISTRATION 

delays. It assigns to each workman a definite and by him accom- 
plishable task, institutes rational rest periods and modes of recreation 
during the working hours, eliminates pace-setters, standardizes per- 
formance, and guards the workers against overspeeding and exhaus- 
tion, nervously and physically. It substitutes the rule of law for 
the arbitrary decisions of foremen, employers, and unions, and treats 
each worker as an independent personality. 

Scientific management thus democratizes industry. It gives a 
voice to both parties and substitutes joint obedience of employers 
and workers to fact and law for obedience to personal authority. No 
such democracy has ever existed in industry before. 

Scientific management and productive efficiency. — Scientific man- 
agement improves and standardizes the industrial organization and 
equipment, betters the training of the workmen, and increases their 
skill and efficiency. It rationalizes the management, improves the 
methods of planning, routing, and accounting, furnishes the best 
machinery, tools, and materials, eliminates avoidable wastes, and 
standardizes the methods of work; gathers up, systematizes, and 
systematically transmits to the workers all the traditional craft 
knowledge and skill which is being lost and destroyed under current 
industrial methods; employs in the shop a corps of competent 
specialists whose duty it is to instruct and train the workers and to 
assist them whenever difficulties arise in connection with the work; 
trains the men in the easiest and best methods of work and brings the 
workmen into close and helpful touch with the management; removes 
from each worker responsibility for the work of others and prevents 
the more efficient from being held back and demoralized by the 
inefficient; increases the productive output; and improves the 
quality of the product. 

Scientific management and labor welfare. — Scientific management, 
through its accurate scientific methods and the laws which it has dis- 
covered and established, its improvement of organization and equip- 
ment, and its democratic spirit, sets each workman to the highest 
task for which his physical and intellectual capacity fits him and 
tends to prevent the degradation and displacement of skilled labor; 
rewards the men for helpful suggestions and improvements in the 
methods of work and provides immediate inspection and immediate 
rewards for increased or improved output; requires the workers to 
perform, not one operation merely, but several operations or tasks; 
trains the workmen mechanically as they were never trained before, 



THE ADMINISTRATION OF PRODUCTION 639 

opens the way for all workmen to become " first-class men," and 
opens up opportunities for the advancement and promotion of the 
workers; stimulates and energizes them intellectually and promotes 
their self-reliance and individuality; insures just treatment of indi- 
vidual workers and pays to each in proportion to his efficiency; and 
guarantees the worker against the arbitrary alteration of the task, 
arbitrary rate cutting, and limitation of earnings. It raises wages and 
shortens the hours of labor; increases the security and continuity 
of employment; and lessens the rigors of shop discipline. It pro- 
motes friendly feeling and relations between the management and 
the men, and among the workers of the shop or group; renders col- 
lective bargaining and trade unionism unnecessary as means of pro- 
tection to the workmen; and tends to prevent strikes and industrial 
warfare and to remove the causes of social unrest. 



B. THE TRADE UNION OBJECTIONS TO SCIENTIFIC 

MANAGEMENT 

"Scientific management" is a device employed for the purpose 
of increasing production and profits and tends to eliminate considera- 
tion for the character, rights, and welfare of the employees. It looks 
upon the worker as a mere instrument of production and reduces him 
to a semi-automatic attachment to the machine or tool. In spirit 
and essence, it is a cunningly devised speeding-up and sweating 
system which puts a premium upon muscle and speed rather than 
brains; forces individuals to become " rushers" and " speeders"; 
stimulates and drives the workers up to the limit of nervous and 
physical exhaustion and over-speeds and over-strains them; shows a 
constant tendency to increase the intensity and extent of the task; 
tends to displace all but the fastest workers; indicates a purpose to 
extract the last ounce of energy from the workers; and holds that if 
the task can be performed it is not too great. 

It intensifies the modern tendency toward specialization of the 
work and the task; is destructive of mechanical education and skill; 
splits up the work into a series of minute tasks tending to confine the 
workers to continuous performance of one of these tasks; tends to 
eliminate skilled crafts; deprives the worker of the opportunity of 
learning a trade; degrades the skilled workers to the condition of 
the less skilled: displaces skilled workers and forces them into compe- 
tition with the less skilled, and narrows the competitive field and 



640 BUSINESS ADMINISTRATION 

weakens the bargaining strength of the workers through specialization 
of the task and the destruction of craft skill. 

It displaces day work and day wage by task work and the piece- 
rate, premium, and bonus systems of payment. It tends to set the 
task on the basis of " stunt" records of the strongest and swiftest 
workers without due allowance for the human element or legitimate 
delays, so that only a few of the strongest and most active workers are 
capable of accomplishing it, and has devised and established modes 
of payment, usually arranged so that it is greatly to the advantage of 
the employer to prevent the workers from equaling or exceeding the 
task, and which usually result in giving the worker less than the regular 
rate of pay for his extra exertion and only a portion and usually the 
smaller portion of the product which his extra exertion has created. 

It establishes a rigid standard of wages regardless of the pro- 
gressive increase in the cost of living, and tends to make it permanent 
at its present low level ; puts a limit upon the amount of wages which 
any man can earn; offers no guaranty against rate-cutting; is itself 
a systematic rate-cutting device; tends to lower the wages of many 
immediately and permanently, and means in the long run more work 
for the same or less pay. 

It tends to lengthen the hours of labor; shortens the tenure of 
service; lessens the certainty and continuity of employment; and 
leads to over-production and the increase of unemployment. It 
condemns the worker to a monotonous routine; tends to deprive him 
of thought, initiative, sense of achievement and joy in his work; 
dwarfs and represses him intellectually; tends to destroy his indi- 
viduality and inventive genius; increases the danger of industrial 
accidents; tends to undermine the worker's health, shortens his 
period of industrial activity and earning powers, and brings on 
premature old age. 

It puts into the hands of employers at large an immense mass of 
information and methods which may be used unscrupulously to the 
detriment of the workers, creates the possibility of systematic black- 
listing, and offers no guaranty against the abuse of its professed 
principles and practices. 

Scientific management in its relation to industrial democracy. — 
" Scientific management" is undemocratic; it is a reversion to indus- 
trial autocracy which forces the workers to depend upon the employers' 
conception of fairness and limits the democratic safeguards of the 
workers. It tends to gather up and transfer to the management all 



THE ADMINISTRATION OF PRODUCTION 641 

the traditional knowledge, the judgment, and the skill of the workers, 
and monopolizes the initiative and skill of the workers in connection 
with the work. It allows the workmen ordinarily no voice in hiring 
or discharge, the setting of the task, the determination of the wage 
rate, or the general conditions of employment; greatly intensifies 
unnecessary managerial dictation and discipline; tends to prevent 
the presentation and denies the consideration of grievances; and 
tends to increase the number of shop offenses and the amount of 
docking and fining; and introduces the spirit of mutual suspicion 
and contest among the men, and thus destroys the solidarity and 
co-operative spirit of the group. It has refused to deal with the 
workers except as individuals; is incompatible with and destructive 
of unionism; destroys all the protective rules established by unions 
and discriminates against union men; and is incompatible with and 
destructive of collective bargaining. 

The unscientific character of scientific management. — "Scientific 
management" in its relation to labor is unscientific. It does not take 
all the elements into consideration but deals with human beings as it 
does with inanimate machines. It violates the fundamental prin- 
ciples of human nature by ignoring habits, temperaments, and tra- 
ditions of work, and tends to minimize the acquired skill of the 
workers; greatly increases the number of "unproductive workers," 
i.e., those engaged in clerical work, and often squeezes out of the 
workers vast overhead charges; is unscientific and unfair in its deter- 
mination of the task and furnishes no just or scientific basis for cal- 
culating the wage rate; and concerns itself almost wholly with the 
problem of production, disregarding in general the vital problem of 
distribution, and violates and indefinitely postpones the application 
of the fundamental principle of justice to distribution. It is based 
on the principle of the survival of the fittest and tends to disregard the 
physical welfare of the workers. 

The inefficiency of scientific management. — "Scientific manage- 
ment" is fundamentally inefficient. It does not tend to develop 
general and long-time economic efficiency. It tends to emphasize 
quantity of product at the expense of quality, and to reduce the 
quality of the work and output. It is incapable of extensive applica- 
tion, and is a theoretical conception already proved a failure in 
practice. 

Scientific management and industrial unrest. — "Scientific manage- 
ment" intensifies the conditions of industrial unrest. It libels the 



642 BUSINESS ADMINISTRATION 

character of the workmen, and its methods are evidence of suspicion 
and direct question of the honesty and fairness of the workers; 
fails to satisfy the workers under it, but, on the contrary, is regarded 
by them with extreme distaste; t pits workman against workman, 
displaces harmony and co-operation among the working group by 
mutual suspicion and controversy, and increases the antagonism 
between the workers and their employers; and increases the points 
of friction and offers no guaranty against industrial warfare, and is 
conducive to strikes. 

REFERENCES FOR FURTHER STUDY 

Church, The Science and Practice of Management. 

Day, Industrial Plants. 

Going, Principles of Industrial Engineering. 

Hoxie, Scientific Management and Labor. 

Jones, The Administration of Industrial Enterprises, chaps, iv-ix. 

Kimball, Principles of Industrial Organization, 

Taylor, Shop Management. 



CHAPTER VII 1 

THE ADMINISTRATION OF RISK-BEARING 

Purposes of this chapter: 

i. To catch a glimpse of the social philosophy back of the posi- 
tion of the modern entrepreneur as a risk-bearer. 

2. To get a working idea of the ways in which risks may be met, 
and especially to see the work of the administrator in this field. 



In our organization of society the owner of private property is in 
a position, through exchange, to command social energy, the compre- 
hensive term for land, labor, capital, and organization. When he 
engages in business enterprise he assumes the direction of social energy, 
and society, in effect, says to him: "If you command social energy 
well — that is, if you produce something for which we are willing to 
pay more than the price at which we value the social energies you 
use — you will reap a reward in profits; if you command poorly, no 
matter whether your failure is due to your own fault or to other con- 
ditions which you cannot foresee or control, you will be punished by 
loss. Society uses this method of stimulating individual initiative 
in the production of goods and services which may be applied to 
want-gratification. ' ' 

We are not here concerned with the question whether this is good 
social organization. It suffices for us that our society is operated on 
this basis and that the owner of private property is, in business 
enterprise, put in a position to receive rewards and punishment. He 
"assumes the risks" of business, we say, but we do not mean that he 
assumes all the risks of business (for example, labor assumes some 
risks also) and we do not mean that the rewards and punishments are 
necessarily unlimited in amount. Society feels free to limit the 
rewards (for example, by excess-profit taxes) and to limit the punish- 
ments (for example, by the limitation of the liability of the owners 
of a corporation) if it believes that such limitation makes for social 
good. 

1 Prepared by Professor C. O. Hardy. 

643 



644 BUSINESS ADMINISTRATION 

After all necessary qualifications have been set forth, it remains 
true that the entrepreneur is a " risk- taker, " and our task is that of 
seeing what this means and how risk-bearing is administered. 

A. The Character of Business Problems and Business Judgments 

Throughout our study of the work of the business manager, em- 
phasis has been placed on the importance of careful planning based 
on exact information. Business management has been treated as an 
applied science, or rather as the application of many sciences to the 
control of business relationships, and much stress has been laid upon 
the value of training in the accumulation, organization, and interpre- 
tation of significant facts upon which to base our judgments. In all 
this there is of course no implication that the business manager 
occupies a unique position. The increasing importance of science in 
business is merely one illustration of its increasing importance in all 
human affairs. 

Nor is it intended to imply that the scientific method is the only 
available method. Nearly everywhere, in addition to the scientific 
method, we see also examples of the so-called practical approach 
to problems. Educators may depend for guidance each on his own 
common sense and experience, or may rely on the results of peda- 
gogical research. Some preachers exemplify uninstructed insight, 
others education; one musician may display the effectiveness of train- 
ing, another the inspiration of genius; the pugilist may win by sheer 
physical superiority or by science and strategy. Each method has 
its place. There is no disposition here to belittle the achievements 
of untrained genius and of common sense. 

As civilization advances the relative importance of science grows. 
On the one hand, the mass of accumulated information and experience 
requires more study and more specialization for its mastery; on the 
other hand, the complexity of the problems to be handled, the magni- 
tude of the enterprises to be controlled, make such mastery ever 
more necessary. Just as in the latter part of the Middle Ages the 
trained lawyer gained control of the administration of justice, and a 
little later the physician wrested physic from the barber, so in the 
nineteenth and twentieth centuries the construction engineer sup- 
plants or directs the rule-of-thumb contractor, the works engineer 
who grew up in the plant gives way to the engineer with technical 
training, the trained nurse ousts the "practical nurse." 



THE ADMINISTRATION OF RISK-BEARING • 645 

The same factors which have brought about the development of 
scientific method in other fields have been operative in the field 
of business management, and here as in other fields the recognition of 
the value of exact knowledge and intelligent planning, though recent, 
has been very rapid. Whether the problem in hand is that of choosing 
a location, promoting an official, canceling a purchase order, refunding 
a bond, or writing an advertisement, the business manager has a 
choice of the two methods of procedure — snap judgment based on 
tradition, personal experience, haphazard information, and the cir- 
cumstances of the moment, or careful judgment based on investiga- 
tion of all the available data. So far as may be, he should rely upon 
the latter. One of the principal functions of this course, indeed, is to 
indicate the value in business of modern methods of scientific analysis 
as developed by students of psychology, geology, physics, economics, 
statistics, and many other sciences. 

But although the drift in the direction of scientific method is 
clear, the extent to which the standards of exact science can be main- 
tained varies greatly with the character of the facts to be handled. 
In the physical sciences no solution is accepted which does not square 
with all the known facts, and if not all the relevant facts are known, 
judgment must be suspended till they can be secured by observation 
or by experiment. In this realm, no truly scientific judgment rests 
on estimates. This is less true of the biological science, and still less 
of the social sciences. In psychology, philology, ethics, sociology, 
education, economics, the phenomena are so complex, the objects of 
study are so heterogeneous, and the mass of relevant data is so 
enormous that resort must often be had to samples instead of complete 
data, estimates frequently take the place of measurements, and 
evidence which falls far short of meeting the standards of the exact 
sciences is necessarily accepted as a basis for generalization. Conse- 
quently conclusions must be less final. This is true partly because of 
considerations of time and partly because of considerations of cost. 1 
The student of astronomy can afford to wait for years for the re- 
appearance of a comet or of a total eclipse to confirm or disprove his 
hypothesis, the physicist can spend enough money on a single experi- 
ment to make sure the conclusions are right, knowing that if the 

1 It is perhaps worth noting that time and cost are not entirely separable 
elements. Often they depend on one another, that is, it is possible to shorten the 
time of an investigation if cost can be disregarded, or to avoid the cost if one can 
wait long enough for the facts to become clear. 



646 BUSINESS ADMINISTRATION 

measurements are exact the experiment need not be repeated, but the 
educator, the military scientist, or the anthropologist cannot as a rule 
test his theories completely in the laboratory. He cannot even 
expend the funds necessary to observe the world-wide variations of 
the phenomenon he is studying. And yet he cannot, if his science is 
to have any practical application, defer judgment till the evolution 
of society has confirmed or disproved his views. Hence he must 
speak in terms of preponderance of evidence, of typical results, of 
tendencies, and of probable results from given lines of conduct. 

The same contrast appears in the attempt to apply the scientific 
method to the solution of business problems which we have seen in 
its application to problems of thought and of knowledge. In dealing 
with certain types of data, highly exact measurements are possible, 
and the results repeat themselves with accuracy. Questions of the 
technique of machine industry are of this type, so long as comparisons 
of prices [of cost goods and output] are excluded, and even these over 
short periods of time are susceptible of very reliable estimation. It 
is in this field, therefore, that scientific management has made the 
most rapid strides. The value of accuracy and of scientific planning 
is no longer a question; the engineer has won his place. In agricul- 
tural production the incalculable element of weather makes it impos- 
sible to predict results with the same accuracy, and in marketing, 
finance, and labor administration uncertainties abound, some due 
merely to the undeveloped state of the science of business research, 
others impossible to avoid. 

PROBLEMS 

1. Why has "practical experience" so long been considered more valuable 
in business than "scientific knowledge" ? Are the two contradictory? 

2. "The greatest hindrance to business success is this theoretical stuff. 
We need to give more attention to practical considerations." "The 
most practical thing in the world is theory." With which quotation 
do you agree ? Can they be reconciled ? 

3. "There can never be laws of management. The term law must be 
reserved for the exact sciences." Comment. 

4. "It is all nonsense to talk of scientific management. Management is 
an art, not a science." Comment. 

5. "Business management is and must remain a guessing match." Why 
or why not ? 

6. "In the field of production the body of knowledge is more exact and 
better organized than in the field of distribution." Is it ? If so, is 
the condition a permanent one ? 



THE ADMINISTRATION OF RISK-BEARING 647 

7. Are the findings of statistics conclusive or merely indicative? 

8. "Measuring Aids of Business Administration." Can you formulate a 
statement indicating the use which may wisely be made of them ? 

9. "The decisions of other managers influence the outcome for any one 
manager." Is this true? If so, what of it? 

10. "Business touches the human equation and uncertainty is therefore 
inevitable." Is the same true of psychology? If so, is psychology 
useless ? 

11. A certain man always "plays a hunch" because, in former years, he 
found he usually made a mistake when he ignored his "hunches." 
Comment. 

12. If two alternatives presented themselves to business managers in one 
line of industry and 85 per cent of them decided in favor of one, would 
the other 15 per cent show good judgment if they decided to rely upon 
the judgment of the majority ? 

13. Do you infer from Selection 3 that thought is not a prerequisite to the 
forming of sound business judgments ? 

14. "The business manager may often form an estimate of probable results 
which will be almost as useful as definite knowledge provided no com- 
petitor has access to better knowledge." Explain. 

15. List as many ways as you can through which a man gets "experience"; 
"education." Are the two different?. 

16. Is there any distinction between a sound judgment and a scientific 
judgment ? 

17. "If time or cost prevents our reaching a final valid judgment, there 
still remain several ways of meeting the situation." What are they ? 

18. Look back over these questions. What have they to do with risk- 
bearing ? 

19. Could not most of these questions have been used in the chapters on 
marketing, personnel, finance, and production? Why bring them 
together in this way in a chapter on risk-bearing ? 

1. A COMPARISON OF PROBLEMS IN PRODUCTION AND 

MARKETING 1 

In the field of production, of course, the body of knowledge is on 
the whole better organized and more precise. The various systems 
of management relate more to production than to marketing. 

Though a vast field for research, marketing has had comparatively 
little scientific study. It has not seemed particularly susceptible to 

1 Adapted by permission from S. O. Martin, "Scientific Study of Marketing," 
in Annals of the American Academy of Political and Social Science, LDX (1915), 
78-80. 



648 BUSINESS ADMINISTRATION 

scientific study. It abounds in the human equation. This does not 
mean that much ability has not been expended on this field not only 
in studying and inciting demand but also in recording performance. 
Map and tack systems, quotas and bonuses, selling costs and carefully 
prepared statistics of various kinds have for a considerable period 
been employed by the most progressive selling organizations. These 
internal statistics have also been accompanied by external statistics 
affecting and reflecting market conditions. But in the last analysis, 
the figures finally used in marketing, however obtained, are based on 
the law of averages, frequency, or proportion; the standards set, no 
matter how carefully and specifically adjusted, are in the last analysis 
averages, modes, or proportions and apply en masse rather than in 
detail. This does not mean that these data are not regarded as 
exceedingly valuable. Nevertheless a great problem in marketing is 
to get down beneath the law of averages and types. 

Production is so much more specialized and standardized, so much 
more precise than marketing, that it is possible, given certain facts of 
material, dimension, and design, to set a maximum time for the per- 
formance of a certain specific operation. The appliers of scientific 
management have, furthermore, shown the possibility of determining 
a minimum time for this operation with conditions continuing the 
same and of prescribing the means whereby this minimum time need 
not be exceeded. In other words, the scientific manager in production 
can not only tell William Jones how long he should be in machining 
a certain part, but can furnish him with the best feeds and speeds to 
employ in doing the work in the time specified, and if the methods and 
time apply in Philadelphia it is presumed that they will also apply in 
Boston. But in marketing, no manager, no matter how able and 
experienced, would attempt to tell Thomas Smith how long he should 
be in selling a pair of shoes to William Jones, not to give more than 
general instructions as to the best way in which to do the selling. 
About the best this manager has been able to do is to say that in a 
week, on the average and according to the season, Thomas Smith 
should sell so many dollars' worth of shoes. In machining the part, 
the conditions are more standardized, the operation more specialized, 
the human factor is smaller and is more under control. In selling the 
shoes, the opposite is true. In production, the time for an operation 
can be measured by minutes and less; in marketing, I have encoun- 
tered no practical use being made of units of less than one week. 



THE ADMINISTRATION OF RISK-BEARING 649 

This warrants the consideration for a moment of certain funda- 
mental differences between production and marketing. These 
differences may be balanced against each other as follows. In produc- 
tion, men meet only as members of the business — as subordinates, 
peers, or superiors. Neither the customer nor the competitor is 
encountered directly. In marketing, on the other hand, men are in 
contact not only with the other members of the business, but also 
with the customer to serve and the competitor to meet. In produc- 
tion, the problems are likely to be more those of cost — material, labor, 
and overhead. In marketing, the attention is more focused on price. 
Knowledge of cost is not particularly essential. The market is 
fixing values outside of the business' control. Emphasis is also likely 
to be laid on quality and service. In production, the problems on 
the whole are internal. In marketing, the problems on the whole are 
external. Competition is on every hand. The market is to be 
analyzed. In production, there is probably for the individual business 
a possibility of greater independence of action. Marketing is prob- 
ably more hedged about by the customs of the trade. In other words, 
as said before, marketing abounds in the human equation. 

2. THE SIGNIFICANCE OF THE HUMAN EQUATION IN 

BUSINESS PROBLEMS 

The last sentence in the preceding selection touches one of the 
fundamental and irremovable elements of uncertainty in the business 
man's problem. "Business touches the human equation." That is, 
the decision of a business problem depends on a judgment as to what 
certain individuals will do under given, or partially given, circum- 
stances. This is always fraught with uncertainty, if for no other 
reason because if A's decision depends on what B will do, and B's 
decision on what A will do, it is obviously impossible for both to get 
all the data they need. The only way in which one can arrive, even 
in theory, at a scientific solution is through a rigid exclusion of free 
choice from his interpretation of human conduct; but on such an 
interpretation the business manager himself would have no interest 
in the result of his analysis anyway, as his own action would be 
determined outside his own choice. 

Moreover, quite apart from the theoretical impossibility of 
arriving at a scientific judgment in matters of human conduct, the 



656 BUSINESS ADMINISTRATION 

business manager runs quickly into practical difficulties similar in 
character to those in the social sciences, and even greater in degree. 
Time and cost set limits to the extent of his researches. No more 
than a general in the field can he wait till all the relevant facts have 
been gathered, nor can he afford to spend in their collection an amount 
greater than they will add to his profits. Even these limits he cannot 
definitely know. How much time, how much money it is worth 
while to spend in trying to complete the data on which to base a 
given decision, depends on facts which frequently cannot be known 
till the investigation is complete and the decision has been made. 

In other words, the choice between two business policies or lines 
of action is in most cases not comparable to the solution of an algebraic 
equation, a type of problem where two trained minds may be expected 
to arrive invariably at the same conclusion. Sometimes it is rather 
like the translation of an inscription on a defaced monument where 
some of the words can be deciphered with ease, some can be made 
out with the aid of photography, and some can only be conjectured. 
Sometimes it is like a question of ethnography, where the expense of 
collecting data concerning an uncivilized race may make it necessary 
to depend on the unconfirmed accounts of a few travelers. Sometimes 
it is like the decision of a general in the field, where action must be 
taken at once, without waiting for the much desired information to 
arrive. 

The conclusion is not, however, that since we cannot know all we 
would like to know we cannot conduct ourselves rationally. If time 
or cost prevents our reaching a valid final judgment, there still remain 
several ways of meeting the situation. 

In the first place the business manager may often form an estimate 
of the most probable results which will be almost as useful as definite 
knowledge provided no competitor has access to better information 
than he has. Such estimates of probability fall roughly into three 
classes. 1 There are, first, a few cases where a quite definite mathe- 
matical estimate of probability can be reached, as for instance that 
a result will be of one character seven times out of a hundred, of 
another character ninety-three times. Many gambling transactions 
are of this sort, but they are rare in ordinary business. The Goodyear 
Company in 192 1 issued a series of 8 per cent bonds, one-fortieth of 
which, drawn by lot, are to be paid at $120 per $100 bond every six 
months for twenty years. It is clear that the probability of an 

1 Cf. Knight, Risk } Uncertainly, and Profit, pp. 214-16, 224-26. 



THE ADMINISTRATION OF RISK-BEARING 651 

investor's securing a 20 per cent bonus for the use of his money for 
six months, twelve months, or any other definite period can be figured 
mathematically and the speculative value of this chance computed 
with corresponding precision. 

A second and larger class of cases afford what may be called a 
statistical basis for judgment. These are cases where no uniformity 
of results could be predicted from the nature of the case, but study 
of past results shows that uniformities have appeared with such 
persistency that we assume they will continue to appear. This is the 
justification of most business research, as distinguished from techno- 
logical research. The merits of specific selling devices, specific 
methods of wage payment or organization of the labor force, or 
specific types of financial instruments cannot be judged even approxi- 
mately by a single case; but by collecting, organizing, and studying a 
mass of representative cases results of great accuracy can be obtained. 

Cases of uncertainty where neither the mathematical nor the 
statistical basis of determining probability is available call for the 
exercise of what we call "judgment." By judgment we here mean 
the ability to weigh the known elements in a situation and determine 
the most probable situation with respect to the unknown. Just what 
this ability consists of and how it can be cultivated is a question of 
great practical interest, but one about which, unfortunately, very 
little is known. 

3. THE FORMATION OF "JUDGMENTS" 1 

The mental operations by which ordinary practical decisions are 
made are very obscure, and it is a matter for surprise that neither 
logicians nor psychologists have shown much interest in them. 
Perhaps (the writer is inclined to this view) it is because there is 
really very little to say about the subject. Prophecy seems to be a 
good deal like memory itself, on which it is based. When we wish to 
think of some man's name, or recall a quotation which has slipped 
our memory, we go to work to do it, and the desired idea comes to 
mind, often when we are thinking about something else, or else it does 
not come, but in either case there is very little that we can tell about 
the operation, very little "technique." So when we try to decide 
what to expect in a certain situation, and how to behave ourselves 
accordingly, we are likely to do a lot of irrelevant mental rambling 

1 Adapted by permission from F. H. Knight, Risk, Uncertainty, and Profit, 
pp. 2ir, 225-27. (Houghton Mifflin Company, 1921.) 



652 BUSINESS ADMINISTRATION 

and the first thing we know we find that we have made up our minds, 
that our course of action is settled. There seems very little meaning 
in what has gone on in our minds, and certainly little kinship with 
the formal processes of logic which the scientist uses in an investiga- 
tion. We contrast the two processes by recognizing that the former 
is not reasoned knowledge, but "judgment," "common-sense," or 
"intuition." There is doubtless some analysis of a crude type 
involved, but in the main it seems that we "infer" largely from our 
experience of the past as a whole, somewhat in the same way that we 
deal with intrinsically simple (unanalyzable) problems like estimating 
distances, weights, or other physical magnitudes when measuring 
instruments are not at hand. 

We know that estimates or judgments are "liable" to err. Some- 
times a rough determination of the magnitude of this "liability" is 
possible, but more generally it is not. In general, any determination 
of the value of an estimate must be secured by the tabulation of 
instances of accuracy and inaccuracy of similar estimates, thus 
reducing it to a probability of the statistical type. 

The theoretical difference between the probability connected with 
a mere estimate and that involved in statistical calculations such as 
those used in life insurance, is clearly discernible. Take as an illustra- 
tion any typical business decision. A manufacturer is considering 
the advisability of making a large commitment in increasing the 
capacity of his works. He "figures" more or less on the proposition, 
taking account as well as possible of the various factors more or less 
susceptible of measurement, but the final result is an "estimate" of 
the probable outcome of any proposed course of action. What is the 
"probability" of error (strictly, of any assigned degree of error) in 
the judgment? It is manifestly meaningless to speak of either 
calculating such a probability a priori or of determining it empirically 
by studying a large number of instances. 

Yet it is true, and the fact can hardly be over-emphasized, that 
a judgment of probability is actually made in such cases. The 
business man himself not merely forms the best estimate he can of the 
outcome of his actions, but he is likely also to estimate the probability 
that his estimate is correct. The degree of "certainty" or of confi- 
dence felt in the conclusion after it is reached cannot be ignored, for it 
is of the greatest practical significance. The action which follows 
upon an opinion depends as much upon the amount of confidence in 
that opinion as it does upon the favorableness of the opinion itself. 



THE ADMINISTRATION OF RISK-BEARING 653 

The ultimate logic, or psychology, of these deliberations is obscure. 
We must simply fall back upon a "capacity" in the intelligent animal 
to form a more or less correct judgment about things, an intuitive 
sense of values. We are so built that what seems to us reasonable is 
likely to be confirmed by experience, or we could not live in the 
world at all. 

[The following might be added to Professor Knight's analysis. 
It seems fairly clear that our judgments, if they have any value at all, 
are based invariably on some sort of experience with similar cases, 
either our own experience or that of others. The cases from which 
we judge may be too few to lend themselves to statistical tabulation, 
or too widely different for comparison, but if we use them at all it 
must be through a crude, perhaps unconscious, application of what is 
essentially the same process as is employed in the statistical method. 
The difference between good judgment and bad judgment resolves 
itself into (1) a difference in the amount of data made available by 
personal experience or by education, (2) the ability to classify that 
experience so that only the relevant items enter into the judgment, 
and (3) the ability to give proper relative weight to the items which 
make it up. 

Of these the last is the most difficult. The tendency is to over- 
value one's own experience in contrast to that of others, to overvalue 
the evidence which points to a conclusion coincident with our own 
desires or interests, and to overvalue the recent experience contrasted 
with that which is less fresh in our minds. To overcome these tenden- 
cies is to gain immensely in skill at forming judgments. And no one 
should feel chagrin if, having taken into consideration all the available 
data and applied his most careful judgment, the event proves him to 
have been wrong. No excellence of judgment can eliminate the 
sphere of uncertainty, it can only tell us what is most probable. If 
the improbable happens, the judgment of the reckless plunger who 
foretold it is not thereby vindicated nor that of the careful student 
discredited. Only average results over a period of time can furnish 
a test of skill. 

Herodotus states the point aptly thus: 

There is nothing more profitable for a man than to take good counsel 
with himself; for even if the event turns out contrary to one's hope, still 
one's decision was right, even though fortune has made it of no effect: 
whereas if a man acts contrary to good counsel, although by luck he gets 
what he had no right to expect, his decision was not any the less foolish. 1 

1 Quoted in Keynes, A Treatise on Probability, p. 307. 



654 BUSINESS ADMINISTRATION 

What has been said in Section A may be summarized as follows: 
The exact scientific method has proved extremely profitable when 
applied to certain problems of business, notably those of machine 
technology. The method of the less exact sciences, namely, the 
collection of sample cases and their interpretation by statistical meth- 
ods, has also proved very profitable when applied to certain types of 
problems, notably market research and personnel administration. 
Questions frequently arise, however, where neither of these methods is 
applicable and reliance must be placed in " judgment." This situation 
arises most frequently (a) when the problem is of such unique character 
that adequate statistical data cannot be compiled (such problems are 
likely to be of major importance) ; (b) when time does not permit the 
collection of data for scientific decision; and (c) when the case does 
not justify the expenditure necessary to form a scientific decision. 
In such cases we can do nothing but reason from such data as we have, 
and recognize the possibility that our results may be wrong.] 



See also p. 768. An Analysis of Business Judgment. 



B. Some of the Leading Forms of Business Risk 

The preceding section gave us a view of the position of the risk- 
taker in our society and some appreciation of the character of business 
problems, from the point of view of risk-bearing. We shall now 
survey the main forms and causes of business risk and in Section C 
(pp. 664-95) we sna ^ take up again the study of the various courses 
of action open to the manager. 

It quickly becomes apparent that there are some risks which 
would be present in any organization of society. There are others 
which owe their presence, or at least their virulence, to our particular 
organization of society. Illustrations of the sources of both these 
classes of risk are given in the following readings. 

PROBLEMS 

1. "The grower, the manufacturer, and the merchant must speculate." 
Why? 

2. Are risks greater in a changing condition of industry ? In a market of 
greater time area ? 

3. Commercial speculation may concern itself either with the time area or 
the space area of the market. Explain. 



THE ADMINISTRATION OF RISK-BEARING 655 

4. How does the " roundaboutness " of modern industry affect risks? 

5. What is chance? As far as this one factor is concerned, is society 
becoming more speculative ? 

6. "The interdependence of a specialized society means risk." Precisely 
why? 

7. Explain how the presence of highly specialized capital goods in modern 
industry accentuates risk. 

8. "The antagonism of specialists increases risk." Precisely why ? 

9. Does increasing complexity of our economic organization increase risk ? 

10. Does the presence of indirect cost in industry mean more risk ? 

11. If competition were to become more strenuous, would risks increase? 
Do competing companies ever get a reduction of risk through their very 
competition ? 

12. Does expanding education have any tendency to increase risk? 

13. How has the development of improved transportation and commu- 
nication affected risk ? 

14. "The pecuniary organization of society not only transmits shock but 
also increases shock during transmission." Is this true? Is it always 
true ? 

15. It has been said that we have a society that is very sensitive to demand 
and to shock. Explain. What is the result, as far as risks are 
concerned ? 

16. When one says that the development of a certain way of doing things 
(e.g., want gratification through specialization) increases risk, is one 
condemning that way ? Does risk mean cost ? 

17. Would any of the risks in our society be eliminated by the adoption of 
socialism ? Would any risks be increased or added ? 

18. "Risk and ignorance are synonymous terms." What has the writer in 
mind in saying this ? 

19. "Remember that risk means uncertainty. Once we know what loss is 
to occur, risk ceases although cost continues." Explain. 

20. Did the medieval craft3man have risks ? If so, what risks ? Are they 
the same as those carried by modern industry ? 

21. "If risk bearing is well performed, so much the better for society. If 
it is poorly performed, so much the worse for society." Specify. 

22. Do you gather that risks are increasing? Is there any answer to this 
question ? Suppose they are increasing; is society worse off ? 

4. SOME LEADING FORMS OF RISK 1 

All risks may be divided into static risks and dynamic risks. 
Static risks are those risks which would be found in a stationary state 
of society. Among them are those due to natural causes, such as 

1 Adapted by permission from John Haynes, "Risk as an Economic Factor," 
Quarterly Journal of Economics, IX (1894-95), 412-14. 



656 BUSINESS ADMINISTRATION 

damage by lightning, hail, earthquake, storms, disease, and many 
others. Risks arising from ignorance are a large class, which includes 
many fires, bankruptcies, sicknesses, accidents, early deaths, and 
failures in business from misdirected effort. Carelessness is closely 
akin to ignorance as a cause of damage. Lack of moral character 
gives rise to a class of risks known by insurance men as moral hazards. 
The most familiar example of this class of risks is the danger of 
incendiary fires. Dishonest failures, bad debts, etc., would fall in 
this class, as well as all forms of danger from the criminal classes. 
When these risks are spoken of as static, it is not meant that dynamic 
changes cannot modify them. Such is not the case. The invention 
of the electric light was a dynamic change which has modified the 
danger of damage by fire. Nevertheless, we may legitimately use 
the word "static" because, even in a stationary state of society, we 
should expect risks of the same essential kind. The amount of loss 
coming from static risks is incapable of calculation, but is certainly 
very great. The losses direct and indirect by fire alone are estimated 
by Mr. Edward Atkinson at $250,000,000 for the United States 
in 1893. 

Other risks may be called dynamic, because they are risks of 
damage which may be directly due to dynamic changes. These are 
chiefly of two kinds, the first being changes in the wants of society. 
As civilization advances, human desires are subject to constant modi- 
fication and to sudden changes in amount and direction. Changes 
of style which cannot be foreseen by producers are an example of 
changes in the wants of society. A stock of men's hats which is 
salable today will, perhaps, be utterly without a market next year. 
A dealer who has an overstock is subject to heavy loss. 

In the second place, changes in methods of production give rise 
to losses which may be subdivided into two classes. The first are the 
losses which fall upon those who are attempting to introduce new 
processes. Professor Clark says: 

The uncertainties that attend the introduction of a new process are 
dynamic, since they would have no existence if industry were to continue 
in a stationary state. There is the chance that the process may be mechani- 
cally defective. It may not create the desired commodity as the projector 
of the enterprise expects. If, on the other hand, the dynamic change 
consists in offering some new commodity for the comfort and pleasure of 
consumers, the public may fail to give the expected welcome. 

The second are losses which fall upon producers in consequence of 
the introduction of improved processes by others. There is constant 



THE ADMINISTRATION OF RISK-BEARING 657 

danger that an innovation or an improvement of some kind will 
destroy the value of property in which a great amount of capital 
has been invested. Losses of this kind differ from those of which 
Professor Clark speaks, in that while causing a loss to individuals, 
they being a social gain. The wealth directed to the unsuccessful 
venture might have been employed in lines of static activity; but, 
by being diverted, it is lost, not only to its owner, but to society as 
well. In the second case, though society is a gainer by the improve- 
ment, individuals are large losers. Losses of this kind have been 
exceedingly common in recent years. A notable case was the destruc- 
tion of capital incident to the opening of the Suez Canal. The ships, 
mainly sailing vessels, which went around the Cape of Good Hope 
and carried the products of India, were not adapted to the canal, and 
an amount of shipping estimated at two million tons was rendered 
practically valueless. It is clear that the total amount of dynamic 
losses must be very great. 

5. THE SEPARATION OF PRODUCER AND CONSUMER 

MEANS RISK 1 

[Even before the days of specialization, when producer and con- 
sumer were one and the same, there was some "business" risks. A 
primitive cultivator of the soil who planted grain took a risk. The 
season might be bad; fowls or animals or a storm might destroy the 
crop. With the coming in of specialization and "production for the 
market, " the possibilities of risk were greatly increased. The follow- 
ing selection deals with this situation, using the term "speculation" 
to express the idea of the assumption of risks.] 

A large speculative element is involved in trade of every kind. 
The trader seeks to buy articles at as low a price as he can and to sell 
them at a higher price. He may do this either by buying them in a 
market where they are cheap and selling them in a market where they 
are dearer; or by buying them at a time when they are cheap and sell- 
ing them at a time when they are dearer. The difference between 
his buying and selling prices represent his profit on the transaction. 
The uncertainty attaching to the amount of such profit makes the 
operation a speculative one. There is a serious risk of loss, which 
the trader assumes for the sake of a possible gain. 

1 Adapted by permission from A. T. Hadley, Economics, pp. 100-115. (G. P. 
Putnam's Sons, 1899.) 



658 BUSINESS ADMINISTRATION 

Down to the present century, a large part of the speculative 
profits were made by taking advantage of differences of price in 
different places — chiefly in connection with foreign trade. The means 
of communication and transport were so defective that there was 
often a great scarcity of an article in one region and an abundance of 
the same article in another. The shipowners who moved the article 
from the latter place to the former had a chance of enormous profits. 
But the business was also attended by great risk. Transportation 
was far less safe, either from the elements or from human violence, 
than it is today. There was no telegraph, no good postal service, no 
efficient protection from pirates by sea or highway robbers by land. 
All these causes combined to render the arrival of goods so uncertain 
that the very wages of the seamen were made contingent upon the 
safe delivery of the cargo, and the whole body of sailors thus became 
participants in the speculation. 

The nineteenth century has witnessed a change in these respects. 
Improved means of communication have greatly lessened the differ- 
ences in price in different markets. It is no longer possible to have 
a glut of wheat in Chicago and a scarcity in Liverpool. The modern 
post-office and the telegraph furnish prompt information of what is 
going on all over the world and enable merchants to know where 
goods are most needed. The steamship and the railroad furnish a 
quick and safe means of placing the goods where they will meet such 
needs as may arise. The difference of price of any staple article in 
two large wholesale markets will not generally be much greater than 
the cost of transportation from one to the other. So moderate have 
the profits from this source become that the business of those who try 
to secure them is now known as arbitrage rather than speculation. 
Only in the trade with barbarous or half-civilized races does foreign 
commerce retain its character as an extra-hazardous business. 

The speculator of today makes his money chiefly by taking 
advantage of differences of price between different times rather than 
between different markets. It is not so much the difference in the 
price of wheat in Chicago and in Liverpool which furnishes the source 
of his profits, as the difference between its price in Chicago this month 
and next month. When such speculation anticipates an actual 
demand, it is of great service to the community. The long time 
which elapses between production and consumption, between con- 
tracts and their fulfilment, makes it extremely important to have 
responsible men to anticipate the wants of the market and take the 
risks on their own shoulders. 



THE ADMINISTRATION OF RISK-BEARING 659 

It is not only in commercial matters but also in industrial ones 
that the speculator exercises a dominant influence. He controls 
production as well as trade. What the merchant does when he buys 
products in the hope of selling them at an advanced price, the manu- 
facturer is doing when he buys labor in the hope of selling the results 
of that labor at a profit. The whole wage system is one under which 
the employers of the country part with property rights today in the 
hope of securing larger property rights in the future. Part of their 
prosperity arises from skill in organizing labor; part, and usually a 
larger part, arises from skill in foreseeing the wants of the market. 
The success or failure of a man engaged in manufacturing, in transpor- 
tation, or in agriculture depends more upon his skill as a prophet than 
upon his industry as a producer. The industrial development of the 
last three or four hundred years, rightly interpreted, is an account of 
the reasons which have led society to put the control of its industry 
into the hands of a body of speculative investors. 

All productive industry involves a certain amount of risk. When- 
ever time elapses between the application of labor and the completion 
of the product of labor in a form available for actual enjoyment, there 
is an advance of capital to the producers for the sake of a remote and 
generally somewhat unknown result. In the building of a factory or 
a railroad a great deal of food is consumed. Whether the product of 
the labor thus applied will be as useful to the community as the food 
which was consumed by those who have produced it, is always some- 
what uncertain. The more remote the consumers in time or place, 
the greater is the uncertainty and the more speculative the whole 
transaction. Especially prominent does this uncertainty become in 
the application of any new process or the development of any new 
locality. Under old conditions, experience has proved what products 
are wanted and how labor can be economially applied; but every new 
invention or new settlement involves a multitude of new and unknown 
conditions. 

6. CHANCE MEANS UNCERTAINTY AND THEREFORE 

RISK 1 

"Chance" means uncertainty; not uncertainty in the frame 
of things, but uncertainty in the beholding mind. That is all. 
" Chance " is a negative term. It announces the absence of knowledge 

1 Adapted by permission from G. H. Palmer, The Problem of Freedom, pp. 
131-39. (Houghton Mifflin Company, 191 1.) 



660 BUSINESS ADMINISTRATION 

and is a way of stating ignorance. When we cannot trace the causa- 
tive connections which have brought an event about, we say it was 
due to chance. Such a word furnishes a convenient label for marking 
occurrences as still dark. 

A few instances will set forth this frequent meaning of chance. 
I shake my dice-box, and say it is all chance how the dice will fall. 
Nobody understands that in the brief space between box and table 
causal agency is suspended, nothing obliging one of the dice to turn 
up the number six. I certainly never intended such a notion, rather 
this : it is impossible so precisely to reckon the forces which steer that 
bit of ivory that we can forecast the number which will finally appear. 
Such minuteness of knowledge implies a delicacy in observing the 
complex play of forces about those little objects which nobody today 
possesses; and though I can make a fairly accurate guess as to the 
frequency with which the number six will turn up, this will not at all 
hinder my attributing the result to chance; for I still wish to mark 
the fact that I know nothing of the way in which laws of gravitation 
have been attacking the different sides of the cube. 

Is this the only meaning of chance, or is chance also objective? 
I believe it is objective. This world is not altogether an orderly 
affair. I hold that, apart from our defective knowledge, there are 
uncertainties in the nature of things. Suppose I am throwing stones 
at a mark. Each stone I hurl as vigorously as possible and all in the 
same direction. As I throw the last one a bird flies across; and the 
stone, instead of moving unimpeded to its mark, collides with him. 
He is killed. What killed him? Chance; his death was due to 
accident. Of course this does not mean that there was no causal 
sequence attending the death and that his existence ceased of itself. 
Everybody knows it was the stone's blow that killed him and that it 
would kill any similar bird in similar circumstances. Sequential 
causes were at work and without them the bird would not have died. 
Where then is the chance? It is found in the concurrence of the 
flight of the bird and the flight of the stone. 

For such coincidences we do well, I believe, to say there is no 
proper cause, that they are affairs of chance, luck, or accident; for 
these terms by no means exclude sequential causation moving in 
straight lines. They merely note the absence of those antesequential 
terms by which combinations are effected. Chance might be defined 
as planless concurrence; and when it is so defined, we discover it all 
around us, in great things and in small. It was an accident that the 



THE ADMINISTRATION OF RISK-BEARING 66 1 

winter was exceptionally severe after the landing on our shore of the 
Pilgrim Fathers; that the tower of Siloam fell on those particular 
persons ; that the partridge flew past me when I did not have my gun. 
The liberties of England are largely due to chance in the storm which 
arose soon after the sailing of the Spanish Armada. For however 
minutely we might become acquainted with the sequence of conditions 
which led up to the storm, or to that other sequence which led up to 
the sailing, we should never discover the wreck among them. That 
was an accident, the coming together of two independent lines of 
causation which until that coinciding moment had no reference to 
one another. 

7. THE INTERDEPENDENCE OF A SPECIALIZED 
SOCIETY INCREASES RISK 1 

We have seen repeatedly that our modern method of producing 
goods is one involving specialization, co-operation, and interdepend- 
ence. This interdependence exposes our risk takers to some very 
serious problems. What happened to a certain cotton planter well 
illustrates this matter. 

This Mississippi cotton planter had for years raised cotton at the 
cost of about nine cents per pound which he sold to a " local buyer" 
in a near-by town. The local buyer in turn sold it to a New Orleans 
agent of a New York firm, and finally it reached the cloth manu- 
facturers of England, France, or New England. In 19 14 while this 
planter was going about his tasks in the usual way events far from 
him were shaping themselves in such a way as to make much that he 
had spent for tools, labor, and seed profitless. Late in July of 19 14 
the great World War began in Europe. In consequence, English, 
French, and German merchants refused to buy new supplies of cotton 
cloth. They did not know how the war might affect their customers. 
Some would be at the front, others out of work, and all would be 
economical in their purchases. As a result, cloth manufacturers in 
Europe did not order cotton from the exporters in the United States. 
Naturally, the exporters would not buy a great deal of cotton from 
the local buyers in the cotton districts. Almost as soon as the cotton 
planter heard of the war he learned that the local cotton buyers were 
offering a lower price for cotton. During the following weeks the 
price fell lower. At times, buyers refused to state any price. Finally, 

1 Adapted by permission from L. C. Marshall and L. S. Lyon, Our Economic 
Organization, pp. 376-79. (The Macmillan Company, 192 1.) 



662 BUSINESS ADMINISTRATION 

however, near the first of December this planter was able to sell his 
cotton at a price of six cents a pound. Instead of making the profit 
that he had anticipated, he sustained a loss of three cents for every 
pound of cotton he raised. 

No one in particular was to blame for the losses of this planter. 
They grew out of the fact that he was producing for an "unknown" 
market. His success or failure depended upon factors over which he 
had no control. These factors affected many other besides this 
planter. When the price of cotton fell, the storekeepers in the cotton 
belt knew that the planters would be unable to buy the usual amounts 
of clothing, shoes, and other necessities and luxuries. As a result 
they refused to purchase goods from manufacturers. One Chicago 
shoe salesman who usually spent two months taking orders from 
Southern storekeepers covered the territory in two weeks. Many 
merchants in the South failed in business, and as they could not pay 
their bills, their creditors — banks from which they had borrowed and 
merchants from whom they had bought goods — were in some cases 
forced into bankruptcy. Factories in turn from whom merchants 
purchased found business dull and in some instances closed their doors. 
Thus there spread over the South, and extended to many businesses 
in the North, a condition that is called a business depression. Manu- 
facturers, banks, farmers, and merchants were all affected. Yet they 
were in no way to blame. The cause lay in the fact that they were 
specialists and were dependent on other specialists. All being inter- 
dependent, the disturbance had spread rapidly to all of them and 
brought with it ruin and loss. 

Sometimes such business depressions are much more severe and 
affect the entire country. Thousands of factories close their doors, 
allowing the machinery which they contain to lie idle. Railroads, 
having few goods to carry, are not used to anything like their full 
capacity. All of this, of course, represents a great waste. The 
factory buildings and machines — which are capital— produce nothing 
and deteriorate while idle. The railroads wear out almost as fast 
when not in use as when traffic is being carried, and thus there is a 
waste of capital when they are not used to the limit. These depres- 
sions sometimes last for months and even years before the readjust- 
ments come which again call for the use of all the capital which 
society has built. 

The risks arising from the foregoing causes are the more difficult 
to meet because of the technological character of modern industry. 



THE ADMINISTRATION OF RISK-BEARING 663 

In these days, money is invested in fixed or specialized capital such 
as machinery, railroads, and buildings. This means that productive 
energy has taken a form which cannot be changed without waste and 
loss. A knitting machine, for example, can be used for but the one 
purpose. If not used for that, it must stand idle. If the idleness 
continues for a long time, it will certainly deteriorate and perhaps 
ultimately it must be scrapped. This means a loss to the owner and 
a waste to society in that there are unused resources. If these capital 
goods could be shifted readily to another use, the loss would not be so 
great, but this is not possible with highly specialized productive 
instruments. The cloth manufacturers of England and France in the 
case just mentioned realized this to the full. In building their facto- 
ries, they had made capital investments. When no orders for cloth 
came, their machines and buildings were idle. Also, the cotton 
exporting companies in New Orleans and other cities had built up the 
trade connections of their business. They had established offices in 
this and other countries; they had installed furniture, telephones, 
and workers. They found that their great organizations had now 
little work to do. Heavy losses to the owners were the result. Nor 
was society gaining from this idle capital and organization. 

8. ANTAGONISM OF SPECIALISTS INCREASES RISK 1 

[Anyone can see that the risk of strikes or lockouts, the risk of a 
"consumer strike" against high prices asked by producers, and all 
such similar conflicts between the specialists of modern society are 
business risks. The following selection is interesting in that it indi- 
cates that a potent cause of such risks is mutual ignorance and 
suspicion on the part of the specialists of our modern impersonal 
society.] 

Wherever a collection of human beings begins to resolve itself 
into a society, the process involves a tacit agreement that some of the 
persons will attend to a certain work needed by the society, while 
others will look after the remainder. The smith, the carpenter, the 
miller, the tanner, the cobbler, are enabled to live without procuring 
their own food supply directly from the soil, by becoming agents of 
the farmers in doing needed work of which the farmers are thus 
relieved. On the other hand, the farmers fall into line with the 

1 Adapted by permission from A. W. Small, "Private Business a Public Trust," 
American Journal of Sociology, I (1895-96), 283-89. 



664 BUSINESS ADMINISTRATION 

necessity of industriously extracting from the soil a supply of food 
sufficient for the whole community, as the condition of getting the 
use of other men's skill. 

The fundamental grievance of classes against other classes in 
modern society is that the supposed offenders are violators of this 
primal law of reciprocity. Criticisms of institutions or of the persons 
operating them resolve themselves into charges that whereas the 
parties in question are presumed to be useful social agencies, they are 
in reality using their social office for the subordination of public weal 
to private gain. This is at bottom the charge of the dissatisfied 
proletarian of all classes against employers, capitalists, corporations, 
trusts, monopolies, legislators, and administrators. This is also in 
large part the implied countercharge against organized labor. The 
most serious count in the wage-earners indictment of other classes is 
not primarily that these classes draw too much pay, but that they are 
not doing the work that their revenues are supposed to represent. 
The unrest of our society today is due, in large measure, to suspicion 
that men are falling more and more into the position of toilers for 
other men who are evading the law of reciprocal service. Dissatisfac- 
tion is fed by belief that many occupations, needful in themselves, 
are becoming less and less a social benefaction and more and more 
a means of levying tribute over and above the value of the service. 



See also p. 164. The Fears of Labor and of Capital. 



C. Ways of Dealing with Risk 

It is clear enough that there is no escape, present or future, from 
the presence of uncertainty in the administration of business, and that 
we must accordingly deal with risk, which may be defined as uncertain 
loss or damage. The elimination of the risk requires the elimination, 
not of the loss or damage itself, but of the uncertainty concerning its 
time or place or extent. Usually this involves the substitution for 
the uncertain loss of a smaller but certain loss in one form or another. 
This cost, for instance, may consist of the price of a safety device, 
which may never be needed, but if it is needed, will save many times 
its cost — it may be an insurance premium, or it may be the cost of 
an investigation to remove the uncertainty. Obviously, it does not 
pay to get rid of all the risk it is possible to get rid of. We could 
practically eliminate fire losses in cities by building every structure 



THE ADMINISTRATION OF RISK-BEARING 665 

of fireproof material, equipping it with automatic sprinklers and sta- 
tioning a fire company in every block, but the cost would far outweigh 
the saving. The problem of administration of risk is chiefly the 
problem of balancing one of these against the other, a loss which may 
or may not occur against the cost involved in getting rid of the risk. 
This present section outlines the various methods of dealing with 
risks. It opens with Selection 9 which reminds us that, as our society 
is organized, it falls to the lot of the entrepreneur to assume business 
risks and continues the discussion begun in Selection 3 on the forma- 
tion of business judgments with particular reference to what may 
be called administrative qualities. Selections 9-16 indicate the 
methods open to the manager in coping with risks on the basis of the 
following outline: 

1. Elimination by 

a) Prevention of the harmful events 

b) Forecasting, or research to remove the uncertainty 

c) Combination of risks 

2. Transfer to others (which may or may not involve elimination of 
the risk), illustrated by 

a) Insurance 

b) Guaranty, suretyship, underwriting, etc. 

c) Contracting out 

d) Hedging 

The section concludes with a brief discussion (Selection 17) of the 
place of the risk-bearing functionary in a modern business organiza- 
tion. 

PROBLEMS 

1. Illustrate risk being reduced (1) by increasing our knowledge of the 
future; (2) by employing safeguards; (3) by insurance; (4) by specu- 
lative contracts; (5) by social control. 

?. Is it possible by foresight and calculation to reduce or to avoid some of 
the risks of industry ? All of the risks of industry ? 

3. Does integration reduce risk ? 

4. Is the collection of statistics by trade journals a co-operative or a 
specialized method of reducing risk ? 

5. Why should not the government undertake research in manufacture on 
the same scale as in agriculture ? 

6. "A strong tendency shows itself for risky enterprises to be carried on by 
large scale methods." Why ? Cite illustrations. Can you cite illus- 
trations of the opposite character ? 



666 BUSINESS ADMINISTRATION 

7. Should a large insurance company be able to give better rates than a 
small one ? 

8. How does incorporation aid in lessening risk? Does the feature of 
limited liability reduce risk or merely transfer it ? 

9. Does insurance reduce risks or does it transfer risks from the individual 
to society ? 

10. Should a state carry insurance on its buildings ? 

11. B, a dealer, has 500 automobiles in stock. Should he insure them? 

12. In ordinary life insurance, what is the risk insured against? At what 
time of life is the risk greatest ? least ? 

13. Should the amount of the insurance carried on buildings depend on 
their cost or on present cost of replacing them ? 

14. C is supported by the income from his wife's property and does not 
work. Should his life be insured? Should his wife's life be insured 
in his favor ? 

15. A certain cotton manufacturer displays great ability in the production 
of cloth, but he is nevertheless barely able to keep his head above water, 
because he is a poor judge of the raw-cotton market and is more likely 
than not to buy when prices are inflated. Show how he could liberate 
himself from the consequences of this defect of judgment. 

16. Speculators are often regarded as mere gamblers. If the whole body 
of speculators were to cease buying and selling grain, and limited them- 
selves to betting upon the course of prices, would the work of commerce 
and industry be carried on exactly as it is at present ? 

17. What is the distinction between trade profit and speculative profit in 
hedging operations ? 

18. "Speculative contracts do not reduce risks; they simply pass the risks 
along, and society must face as many and as great risks as would have 
been the case if no such device as speculative contracts had arisen." 
Is this true ? 

19. "The speculative trader of the board of trade is another specialist." Is 
this true ? If so., in what does he specialize ? 

20. "The board of trade is one of the greatest insurance institutions in 
existence." Do you agree? 

21. Under government control of the wheat market there was no trade 
in future contracts. Does this show that they are unnecessary ? 

22. Is speculation a result or a cause of risk ? 

23. Companies writing fidelity insurance inquire whether their candidate 
speculates. Why ? 

24. Sometimes bonds are callable at a certain price until a certain date, say 
five years before maturity, and after that at a lower price. Is this a 
logical arrangement ? 

25. How, if at all, does budgeting affect risks ? Cost accounting ? 



THE ADMINISTRATION OF RISK-BEARING 667 

26. Do consumers bear any risks? Do they bear all risks? If they do, 
what is meant by speaking of the entrepreneur as the risk-taker of 
industry ? 

27. If A indorses B's note, and the holder estimates the risk of A's failure 
at 1 per cent and B's failure at 2 per cent, what is the probability of 
both failing ? Does it make any difference whether they are in business 
relations with one another or are in similar occupations ? 

28. " Given other qualities the same, a pessimist will outdistance an optimist 
because, not having so great faith in luck, he will work harder and will 
look facts more squarely in the face." Do you agree? 

29. Give some examples of when "it is cheaper to run risks than to avoid 
them." 

30. "An expert business manager is a great aid in lessening risk." Does 
he reduce risk or transfer it ? 

31. Does the elimination of risk mean the elimination of loss? 

9. ENTREPRENEURSHIP AND ADMINISTRATIVE 

QUALITIES 

Wherever modern capitalistic methods have gone, the production 
and distribution of goods require that expenses be incurred and 
responsibilities undertaken long before the goods are to be consumed. 
This means that risks must be incurred — technical risks, market risks, 
and risks of social and political change. As we are organized, these 
risks fall chiefly on the producer and distributor. Conceivably they 
might be carried by the consumer, as they are to a limited extent, 
especially when goods are made to order. But typically (and increas- 
ingly) the producing or distributing organization assumes these risks 
and, as has often been pointed out by theoretical economists, the 
possibility of making profit (as distinguished from the market rate 
of interest and wages) arises chiefly from this fact. This means that 
certain mental attitudes and characteristics are necessary for adminis- 
tration and operate more or less crudely to select the individuals on 
whom the responsibilities of business shall fall. 

Without attempting an exhaustive survey, attention may be 
directed to four of the qualifications which seem to be most directly 
significant in the selection of business managers. The first is business 
judgment, the second is willingness to incur the risk of making a 
mistake, the third is open-mindedness, the fourth is decision. 

All these qualities have to do with one's attitude toward uncer- 
tainty. Business judgment has already been discussed (see pp. 644- 
54). Willingness to incur risk involves several characteristics. A 



668 BUSINESS ADMINISTRATION 

large element in it is confidence in one's own judgment. This is 
something quite distinct from the ability to form a correct judgment. 
To quote Professor Knight again: 

In addition there is diversity in conduct in situations involving uncer- 
tainty due to differences in the amount of confidence which individuals 
feel in their judgments when formed in their powers of execution; this 
degree of confidence is in large measure independent of the "true value" 

of the judgments and powers themselves It is a familiar fact that 

some individuals want to be sure and will hardly "take chances" at all, 
while others like to work on original hypotheses and seem to prefer rather 
than shun uncertainty. It is common to see people act on assumptions in 
ways which their own opinions of the value of the assumption does not 
warrant; there is a disposition to " trust in one's luck." 1 

Next to business judgment this quality of confidence in and willingness 
to act on one's best judgment where certainty is absent seems to be 
the most decisive factor in determining whether one shall be among 
those who occupy positions of responsibility — indeed, so far as the 
choice of managers is concerned this factor of willingness to accept 
responsibility is perhaps more important than the ability to form 
correct judgments, though less important in determining the mana- 
ger's success. The other two qualifications for dealing effectively 
with risk, decision and open-mindedness, may seem at first to be 
inconsistent with one another, but they are not. By open-mindedness 
we mean the ability and willingness to change our decision or 
opinion as soon as the appearance of new evidence makes it appear 
that our former position was wrong; by decision the ability and will 
to stick to a judgment once formed until such reason for change has 
actually appeared. Efficiency in business management, as in most 
responsible tasks, requires that one steer a middle course between 
two extremes. On the one hand, we have the vacillator, the wobbly- 
minded man who, having chosen one line of policy on a doubtful issue, 
cannot forget the alternative and is constantly reopening the issue and 
debating the question over without any new evidence on which to 
decide. At the other extreme we have the "bullhead, " the man who, 
having chosen an alternative, sticks to it with obstinacy, refusing to 
be influenced by new evidence which may make the grounds of his 
original choice no longer valid. There are none so blind as those who 
will not see. 

See also p. 794. Administration as Leadership. 
1 F. H. Knight, op. ciL, p. 242. 



THE ADMINISTRATION OF RISK-BEARING 669 

10. THE PREVENTION OF HARMFUL EVENTS AND THE 

USE OF RESEARCH 

No very detailed discussion of the preventive method of eliminat- 
ing risk is necessary. Umbrellas, lightning-rods, fireproof walls, and 
burglar alarms furnish illustrations. One prevalent phase of the 
preventive method of dealing with risk should be noted, however, 
namely, the practice of maintaining reserves for contingencies. Thus 
the manager of a bank in addition to the funds he expects to need 
from day to day, carries in his vaults a sum of idle money which he 
probably will not need, but which some time he may need very badly. 
The grocer carries a little bigger stock than he will probably need 
before he can secure another shipment. Financial managers refuse to 
pay out in dividends the entire earnings of their firms, or even the full 
amount which can apparently be spared. Manufacturers carry extra 
stocks of raw materials and of repair parts. Such reserves are not 
entirely due to the risk. They may be accounted for by economies 
in manufacture or transportation of large units. But in large part 
they are necessitated by the presence of risk. 

So long as uncertainty exists, the loss of production due to the 
idleness of the labor reserve or the capital reserve cannot properly be 
called a waste. Its maintenance is a cost — the cost of uncertainty. 
Whether it is a social waste depends on the question whether the 
uncertainty can be removed at a cost less than the loss of production 
from the maintenance of the reserve. In large part, the uncertainty 
is of course quite beyond our powers to remove. So long as this is 
true, the cost of maintaining reserves is no more a "waste" than is 
the wear and tear on machinery or the cost of raw materials used up. 

Neither is it necessary, in view of the emphasis on scientific method 
in other parts of this work, to discuss at length the field of research. 
Whenever the bounds of knowledge are extended the field of risk is 
narrowed. The importance of commercial research as a basis for the 
management of the market, of psychological and social investigation 
as a guide in the administration of personnel problems, time study, 
laboratory analysis, and other technical methods of attack, all these 
are familiar ideas, however far we may fall short of realizing their 
possibilities in practice. 

There are very definite limits, however, to the extent to which indi- 
vidual businesses will ever find it to their advantage to eliminate risk 
either through research or through protective devices. The determin- 
ing consideration is one of cost, and there are many fields in which it 



670 BUSINESS ADMINISTRATION 

remains true that it is cheaper to run risks than to avoid them. Cost 
of elimination of risk is often in the nature of a fixed charge. The 
larger the volume of business, the more likely is this fixed charge to 
be a good investment; hence a strong tendency shows itself, other 
things being equal, for risky enterprises to be carried by large-scale 
methods. The same advantage may be gained by either of two 
other methods — co-operation and specialization. In the co-operative 
method the cost of research or protection is divided directly among 
a large number of business units, while by the method of specialization 
it is shifted to business units which specialize in carrying or eliminating 
the risk and are paid for so doing. 

Co-operative action to reduce risk is well illustrated by many of 
the activities of government. Weather-forecasting has reduced im- 
mensely the risks of loss and damage to property on account of frost 
and flood. No single business could afford to maintain a weather- 
forecasting service of the scope of that provided by the government, 
yet when the cost of this service is spread over all the lines of business 
which profit by it, it makes only a trifling addition to the burden of 
taxation. Research undertaken by the Department of Agriculture, 
the Department of Commerce, consular bureaus, and the Geological 
Survey have resulted in large additions to our store of exact knowledge 
in fields where a few years ago production was prevented or made 
hazardous by a lack of sufficient facts on which to base a valid judg- 
ment. In like manner government may be shown to be our most 
important co-operative device for eliminating risk through prevention 
of harmful events. The maintenance of fire departments and of 
lighthouses and many other phases of government activity are merely 
co-operative methods of eliminating the risks of production through 
activities which would be far too costly for single businesses, but which 
are very economical when their cost is divided among all who benefit 
from them. Other co-operative devices besides government may be 
used in the same way. Chambers of commerce maintain bureaus of 
exchange of credit information to lessen the risk of bad debts. In 
small communities they often contribute to the support of night 
watchmen to supplement the protection afforded by the city police. 
Trade associations reduce risk by the maintenance of research organi- 
zations. This is but a beginning of a very long list. 

The other characteristic modern method of spreading the cost of 
research over a large number of business units is the development of 
specialists who furnish the service for pay. This method is illustrated 



THE ADMINISTRATION OF RISK-BEARING 671 

by such diverse enterprises as clipping bureaus, the Business Bourse, 
advertising agencies, investors' service bureaus. A very recent de- 
velopment of this sort is the specialized labor service bureau whose 
chief business is the collection of data for trade-union use in labor 
disputes. 



See also p. 415. Some Financial Information Gatherers. 

pp. 192-226. Measuring Aids of Personnel Administra- 
tion. 
p. 314. Analysis of Product, Market, and Channels of 

Distribution. 
p. 319. Some Phases of Market Analysis, 
p. 337. Measuring Aids, Quotes, and Budgetary Control. 



11. ELIMINATION BY COMBINATION OF RISKS 

A 

By combination of risks is meant a grouping of similar items in 
such a way that we can tell more about the group than we can about 
the items which compose it. Elimination of risk by combination is 
the application of the so-called law of large numbers. It is often the 
case that wc have a high degree of certainty about a group of data 
while at the same time we are in complete ignorance about the par- 
ticular items which make up the group. Thus we may be quite sure 
that we can predict within 30 per cent the amount of rainfall which 
will occur in a given region in the next year, while if we try to predict 
the precipitation for any particular week, it is more likely than not 
that the actual result will be either less than 10 per cent or more than 
1,000 per cent of our estimate. So with death rates, marriages, 
enrollments in colleges, desertions from the army, accidents due to 
fireworks, and thousands of other contingencies. A single event 
defies prediction, but the mass remains always practically the same 
or varies in ways which we can predict. It is obvious that any device 
by which we can base our business decisions on the average which we 
can predict, instead of on the single event, means the elimination of 
unnecessary risk. The larger the number of cases observed the less 
is the deviation of observed results from those which a priori were 
most probable. 

It follows that large-scale production has an advantage over 
small-scale in that the amount of uncertainty grows less as the scale 



672 BUSINESS ADMINISTRATION 

of business grows larger, hence reserves of cash, of raw materials, of 
machinery, and even of labor can be smaller than if the same amount 
of business is split up among a number of smaller units. This applies, 
however, only in so far as the uncertainties to which the various 
smaller units would be exposed are independent of one another. 
One bank with a million dollars of deposits can safely carry smaller 
reserves than ten banks with one hundred thousand dollars of deposits 
each, so far as the uncertainty of day-to-day demands is concerned, 
or the hazard of individual independent failures among their borrow- 
ers, but against such a hazard as war or panic the larger bank needs 
as large a reserve as would the ten smaller ones. So with life insurance 
companies. The ordinary variation of death claims from year to 
year will be less in a large company than in a small one, but the 
variation due to an epidemic is likely to be as great with one class as 
with the other. 

B 1 

The amount of uncertainty depends on the amount of variation 
to which an enterprise is exposed, the law being that the greater the 
range or number of distinct variations the greater will be the feeling 
of doubt. Now the amount of variation depends upon the period of 
time we take. In copper mining the probability of a great fall in 
price by the discovery of new mines, or of a great rise in price through 
expansion of commercial demand, is certainly greater if we take the 
next ten years than if we take the next rive. The danger that the price 
of a manufactured article will decline owing to betterment of the 
machinery for making it is certainly greater the longer the period, 
if we admit, as we must, that more improvement is likely to occur in 
eight years than in two. 

The amount of variation that must be endured by an enterprise 
is that occurring between the moment when an unfavorable alteration 
is perceived and the moment of withdrawal. If exodus is practicable 
within one year, the exposure to variation is less than if two years 
were needed in order to extricate one's self from the declining industry. 
Flexibility is, therefore, an advantage and is a greater advantage in 
a variable industry than in a stable one. The flexibility depends 
chiefly on the extent and form of auxiliary capital employed, the 

1 Adapted by permission from E. A. Ross, " Uncertainty as a Factor in Pro- 
duction," in Annals of the American Academy of Political and Social Science, VIII 
(1896), 113-19. 



THE ADMINISTRATION OF RISK-BEARING 673 

distinction just made resolves itself into a contrast between businesses 
with fixed capital and those without. 

The effect of superadding to differences in flexibility the element 
of uncertainty in price is to exaggerate these differences. Differences 
in flexibility of little moment in the stable branches have important 
consequences in the more speculative branches. One effect, of course, 
is to check the flow of industrial energies into doubtful enterprises 
which demand a heavy initial outlay. The clearing of land for a 
special crop such as coffee or cane, the building of sluices for mining 
a speculative metal, the creating of an irrigation system for a valley 
depending for access to market upon a very dubious railroad expan- 
sion, are cases in point. 

Another effect is to hold production down to an inferior technique. 
Articles of fashion are made by hand rather than by machinery, not 
so much because hand labor is superior, as because it involves less 
outlay of capital. The same thing is visible when the business is 
under the menace of a possible substitute. The effects of rapid 
electrical development upon the technique of gas works, of the possible 
cable car, upon the ratio of circulating capital to fixed in the conduct 
of horse-car lines, of the ubiquitous trolley car upon the building of 
Macadam roads exemplify this. A business facing a squally future 
must not spread much sail. Where there is doubt of the outcome the 
entrepreneur must hold himself in light marching order, ready to 
move at a moment's notice. 

The uncertainty as regards the yield of product sets up a current 
of amalgamation that favors large-scale industry. In almost any line 
of production minor fluctuations are constantly occurring in the 
different parts of a business. As, however, these succumb to an 
average within the single enterprise, they inspire no uncertainty and 
are not disturbing factors. The larger the enterprise the more do the 
variations incident to its branch of production reduce to an average 
and disappear, the fewer are the uncomprehended species of variation. 
For instance, to the owner of a cow the loss at calving time is uncer- 
tain, while to the owner of a great herd this loss appears as a regular 
percentage that can be computed and allowed for. Even to the 
rancher the loss by stampede is uncertain, but to a great cattle syndi- 
cate with many herds, the loss from this source can be roughly esti- 
mated in advance. Again, in a small refinery the possibility of 
over-doing a batch of oil or sugar may be a source of serious uncer- 
tainty, while in a large refinery the law of the average prevails. 



674 BUSINESS ADMINISTRATION 

Thus with increase in the comprehensiveness of the individual 
enterprise, the species of variation that do not succumb to the average 
but remain sources of doubt, become fewer. This gives rise to three 
types of enlargement; to amalgamation or the fusing together of 
co-ordinate processes as, for instance, in mixed farming; to compre- 
hension or the fusing of successive processes as, for instance, in the 
pottery industry; and to expansion, or the repetition of the same 
operations as in the big cotton mill or refinery. 

It follows then that in the variable branches the small enterprise 
will be duly starved, while the large undertaking will flourish beyond 
its economic limit. It will be observed, however, that where we have 
to do with the fluctuations of price rather than of yield this effect is 
absent. The movements of price affect the entire product at a given 
moment and are not overtaken and engulfed as an enterprise expands. 

Now most variations of product, especially in mining or manu- 
facturing, are confined to the individual establishment; variations of 
price, however, extend to all enterprises in the same branch of produc- 
tion. From this it follows that the one least able to make a doubtful 
venture is the small undertaker who embarks his entire capital ; abler 
is the rich man who supports several other enterprises in the same 
line of business; ablest the man of ample resources who has many 
investments in widely sundered departments of activity. Our first 
discovery, then, regarding business management is that poor men will 
confine themselves to the steadier branches, while the variable branches 
will fall into the hands of men of large resources; and unless there 
are enough rich men to man the speculative branches there will be an 
undersupply, leading to high profits, which will be reaped by those 
who are able to engage in them. Thus monied men by capturing the 
lucrative fields of enterprise will widen still more the gap between 
themselves and the mass. 

But with a rapid growth in the size of the business unit, the great 
fortunes prove too few to handle the big enterprises. Hence the 
joint-stock corporation is invoked to supply masses of capital without 
calling on the rich man. Albeit the stimulus to corporate enterprise 
has been ascribed to the growth of great industry, no small measure 
of its success has been due to its fitness for uncertain undertakings. 
By owning stock in a dozen different corporations and sharing in a 
dozen undertakings, one is exposed to twelve times as many varia- 
tions, but each disturbs only one-twelfth as much as when one is 
proprietor of a single enterprise. Some of the numerous variations 



THE ADMINISTRATION OF RISK-BEARING 675 

will cancel each other, and the rest will locate their effects at the 
margin of one's fortune, where the subjective value of equal losses 
and gains is nearly the same. 

The corporate form, therefore, is at its best a mutual insurance 
scheme, whereby the losses and gains due to variations are first pooled, 
and then shared equitably among a large number. By thus enlarging 
the bearing and absorbing surface, by creating solidarity through the 
interlacing of many private interests, the difference between the vari- 
able and the uniform type of production is minimized. While there 
is a corporate drift all over the field of business, we find it most 
pronounced in speculative branches, such as mining, boring for oil or 
gas, electric enterprise, building and improvement undertakings, the 
theatre business, and the introduction of new devices, machines, 
utensils, toys, foods, fibres, fuels, etc. 

The unlikeness of industries in variability brings about a psycho- 
logical segregation of men. Where result is extremely variable, as in 
prospecting, gold-mining, boring for gas or oil, blockade-running, 
smuggling, opening of new markets, etc., or where price is extremely 
variable, as bonds of doubtful governments, mining shares, trust 
certificates, agricultural produce, etc., certain adventurous speculative 
spirits crowd in and take charge. In the safe industries, on the othei 
hand, we find the cautious, prudent, calculating men, who love 
precision and settledness, abhor hazard, and are terrified by 
uncertainty. 

Summarizing we find that in the more variable branches of 
production: 

1. The inflow of productive powers is less than it should be. 

2. The ratio of fixed capital to circulating is less than is eco- 
nomically desirable. 

3. The large concern enjoys peculiar advantage over the small 
concern. 

4. A high rate of profit prevails, reaped for the most part by men 
of large means. 

5. The corporate form of industry prevails more than elsewhere. 

6. Special agencies are called into being, and induced to assume 
the consequences of certain unfavorable variations. 1 

7. The sanguine, hopeful, adventurous class crowd in, while the 
cautious timid class of men betake themselves to other branches. 

1 Professor Ross's discussion of this topic is omitted, as the point is discussed 
in a later section of the chapter. 



676 BUSINESS ADMINISTRATION 



Forecasts based upon existing knowledge are,, in general, more 
certain, when they are made about collections than when they are 
made about individual members of collection. 

In general, the investment of a sum of money in equal parts in a 
hundred similar enterprises involves less uncertainty-bearing than the 
investment of the same sum in one of these enterprises. It follows 
further, that, if out of a hundred people, each of whom has £100 to 
invest, every one divides his investment among a hundred enterprises, 
the aggregate amount of uncertainty-bearing undertaken by the group 
is smaller than it would have been had every investor concentrated 
on a single enterprise. The physical result of the investments taken 
together must, however, be the same in the two cases. Therefore, 
whenever more or less independent uncertainties are combined to- 
gether, a given result can be attained by a smaller amount of 
uncertainty-bearing, or, to put the matter otherwise, the factor 
uncertainty-bearing has been made technically more efficient. 2 The 
principle thus explained is fully recognized by business men, and has 
long lain at the root both of insurance and of much speculative dealing 
on Change. In modern times, however, the range of its applicability 
to industrial undertakings has been greatly extended by two important 
changes that have recently occurred. Of these the one is a legal 
change, namely, the concession to joint-stock companies of the 
privilege of limited liability; the other a natural change, namely, the 
development in the means of transport and communication. The 
ways in which these two changes have facilitated the application of 
the above principle may, therefore, now be examined. 

So long as liability was unlimited, it was often against a man's 
interest to spread his investments; for, if he did so, he multiplied the 
points from which an unlimited call on his resources might be made. 
The English Limited Liability Act of 1862 and its foreign counterparts 
enabled investments to be spread, without evoking this danger. 

1 Adapted by permission from A. C. Pigou, Wealth and Welfare, pp. 100-103. 
(The Macmillan Company, 1912.) 

2 This circumstance, of course, permits the release, partly for immediate 
consumption and partly for investment, of resources which must otherwise have 
been stored. For example, the combination of the community's reserves in banks 
lowers the amount of aggregate reserve necessary, increases the capital available 
for investment, and pro tanto lowers the rate of interest. (Cf. H. G. Brown, 
"Commercial Banking and the Rate of Interest," Quarterly Journal of Economics, 
XXIV (iqio), 743 f.) 



THE ADMINISTRATION OF RISK-BEARING 677 

Furthermore, intermediary organizations have been developed, cap- 
able of spreading investments on behalf of persons whose resources 
are too small to allow of their spreading them for themselves. Since 
the minimum share in industrial enterprises is seldom less than £1, 
the small investor's capacity for direct spreading is, even under 
limited liability, strictly limited. Savings banks, friendly societies, 
trade unions, building societies, co-operative societies, trust companies, 
and so forth are able, however, to put him in a position as favorable 
in this respect as is occupied by the large capitalist. Now, the spread- 
ing of investments obviously means a combination of uncertainties 
on the part of all investors who hold shares in more than one company. 
But, spreading, on the basis of limited liability, carries with it yet 
another element of combination. For, in general, each business deals 
directly or indirectly with many businesses. If one of them fails for 
a million pounds, under unlimited liability the whole of the loss falls 
on the shareholders or partners; but, under limited liability apart of 
it is scattered among the shareholders or partners of a great number 
of businesses. Hence, any shareholder in one business combines with 
the uncertainty proper to his own business some of that proper to 
other businesses also. It follows that the range of uncertainty, to 
which a normal £100 invested in industry is subjected by reason of 
failures, is still further diminished in amount. This advantage is 
additional to, and quite distinct from, any direct national gain which 
limited liability may give to a country by throwing a part of the real 
cost of its unsuccessful enterprises upon foreigners. 

The development in the means of communication facilitates the 
combination of uncertainties in one very simple way. It puts 
investors into contact with a greater number of different openings 
than were formerly available. This effect, though of great impor- 
tance, is so obvious and direct that no comment upon it is required. 
There is, however, a more subtle way in which the development in 
the means of communication works. Dr. Cassel has observed that 
industrial firms have, in recent times, been lessening the quantity of 
stock that they carry in store, waiting to be worked up, relatively to 
their total business. The improvement in this respect applies all round. 
As regards production, "there is, in the best-organized industries, 
very little in the way of material lying idle between two different acts 
of production, even if these acts have to be carried out in different 
factories, perhaps at great distances from each other. A modern 
iron-works has no large stock either of raw materials or of their 



678 BUSINESS ADMINISTRATION 

product, yet there is a continuous stream of ore and coal entering, 
and of iron being turned out of it." In like manner, factories are 
coming to keep a smaller amount of capital locked up in the form of 
reserve machines not ordinarily in use. The same tendency is appar T 
ent in retail trading. The ratio of the average amount of stock kept 
to the aggregate annual turn-over is smaller than it used to be. 

Now, prima facia, this change of custom would seem to be of little 
significance. After all, a reduction in the amount of finished goods 
held by retailers, of reserve machinery held by manufacturers, and so 
on, does not necessarily imply a reduction in the aggregate amount 
of these things held by the whole body of industrialists. On the con- 
trary, we are naturally inclined to suggest that the wholesaler and the 
machine-maker must increase their stocks pari passu with the decrease 
in the stocks of their clients. As a matter of fact, however, this 
suggestion is incorrect. The reason is that the wholesaler and the 
machine-maker represent points at which uncertainties can be com- 
bined. The development of the means of communication, therefore, 
in so far as it directly transfers to them the task of bearing uncertainty, 
indirectly lessens the amount of uncertainty that needs to be borne. 
Uncertainty-bearing, in short, is rendered more efficient. 



See also p. 553. Technological Industry Frequently Large-Scale, 
p. 745. Some Methods of Concentration of Control, 
p. 724. Some Results of Incorporation. 



12. SOME RISKS OF INVESTORS AND HOW THEY 

ARE MET 

When a business is organized, the owner of the business and his 
employees enter into a co-operative scheme for carrying on production, 
each specializing in furnishing certain services. The labor group 
furnish their time, skill, and energy. The capitalist-lender furnishes 
the use of his capital. The owner furnishes part of the capital and 
part of the time and skill, and assumes the responsibility for determin- 
ing the fundamental policies of the business. The risk is divided 
between them. The laborer assumes most of the risks of physical 
harm, which arise in the processes of production, though the modern 
tendency is to transfer the financial hazard of accidents in large part 
to the employer. The laborer also assumes the risk that if the 
enterprise is unsuccessful, or if it develops in such a way that his 
services are no longer needed, he will find himself left without employ- 



THE ADMINISTRATION OF RISK-BEARING 679 

ment. The capitalist-lender subjects his investment to the hazard of 
complete loss if the business proves so unsuccessful that the entire 
capital invested in the business is sunk so that the loans cannot be 
repaid. The owner-manager assumes the risk of failure just so far as 
his resources are sufficient to cover that risk. He also risks the loss 
of his time and of his reputation. Statistics of business failures indi- 
cate that these risks are considerable. The number of commercial 
failures involving loss to creditors runs from § per cent to ij per cent 
per year. If we had statistics showing the number of businesses which 
bring loss instead of gain to their owner, without actually failing, 
or which do not yield a fair return for the time he puts into them, the 
totals would of course run much higher. 

Incorporation is a device for making possible a further specializa- 
tion of risk-bearing. As has been pointed out in chapter v, the issu- 
ance of various types of securities makes it possible for the risk to be 
divided among a large number of specialists, each of whom takes only 
a small share in the risk of any particular business, and moreover takes 
in each business pretty much the kind of risk he chooses, some prefer- 
ring to take preferred stocks or bonds offering a high degree of safety 
with comparatively low return, while others take common stocks 
which offer the possibility of larger return but a larger degree of risk. 
By varying the proportion of stocks and bonds and by special contract 
provisions the risk can be provided in almost as many ways as there 
are investors. 

The foregoing discussion has reference to the risk of loss of capital 
resulting from mistakes of investors and managers. Another risk is 
involved in investments of capital, however, the risk that one will not 
be able to get his capital back at the time he wants it even though the 
investment be perfectly good. From the standpoint of the debtor 
there is a similar risk in the possibility that he may be called upon to 
repay the loan at an inconvenient time. Every commercial crisis 
results in numerous financial embarrassments, arising on the one hand 
from unexpected failures to secure renewals of loans which have been 
counted on by debtors, and on the other hand from the failure of 
debtors to furnish promptly the funds which have been counted on by 
creditors. It is obvious that this risk, which for convenience we may 
call time risk, cannot be entirely eliminated so long as we employ a 
credit system, for if debtors are secure against having to repay 
advances at inconvenient times, creditors cannot at the same time be 
secure against the risk of failure to collect when they need the funds. 



680 BUSINESS ADMINISTRATION 

All that can be done is to adjust the interest rate to fit the distri- 
bution of the risk. This is done in various ways. In ordinary bank 
deposits the time risk is all on the borrower — the bank must repay 
the loan on demand. Consequently depositors can expect little or no 
interest on their balances. In the case of a callable bond, i.e., a bond 
which may be called in for payment at any time the issuer chooses to 
do so, on the other hand, the time risk is all on the lender. So great 
is the advantage which this gives the borrower that callable bonds 
cannot be sold at ordinary rates of interest except by making them 
callable at a price somewhat above par. Ordinary call loans can be 
terminated immediately at the option of either party. Such con- 
tracts exhibit the greatest variation in interest rates. Sometimes the 
condition of the market is such that the callability of the loan makes 
it very desirable from the lender's standpoint and call rates are very 
low. At other times the demand for such loans far outruns the supply 
and the rate runs up to figures never approached in any other type of 
loan. In long-time loans, such as bonds and mortgage loans, the 
contract cannot be terminated by either party without the consent of 
the other. Time risk is divided. Here again as in the case of call 
loans, the rate charged depends on the condition of the market. 
Usually a large number of lenders prefer to carry the risk of wanting 
their money before they can get it rather than the risk of having it 
repaid before they want it on their hands. Consequently the rate on 
long-time loan tends to be low. When rates are expected to rise, 
however, the time risk is considered heavier from the lender's stand- 
point on the long loans and from the borrower's standpoint on the 
short loans, and rates on long loans are apt to be higher. 

Incorporation and the stock exchange make possible great reduc- 
tion in this sort of risk. By investing in a bond or share of stock 
which has a continuous market, the investor can gain most of the 
advantages of freedom from time risk which are afforded by call loans, 
while at the same time the issuing corporation is free from the incon- 
venience of sudden and unexpected calls for the return of the capital 
which it is using. Of course, the investor pays for this advantage. 
A security which is readily marketable will sell at a higher price or, 
to state the same thing in another way, will yield a low rate on the 
investment. Hence it is important for the investor to consider before 
buying a security whether he really needs the advantages of market- 
ability. If he does not, it is a waste of money to pay for it. 



THE ADMINISTRATION OF RISK-BEARING 6§i 

The most conservative, i.e., the safest, not necessarily the most 
profitable investment is the repayment of one's own debts. Reduc- 
tion of liabilities creates no risk, and frequently saves interest charges 
enough to give an abnormally high return for a safe investment. 
This is true because payment of the debt reduces risk for the creditor 
without creating risk for the debtor. From the standpoint of risk, 
there is therefore a real social gain in the liquidation of debts. This 
may of course be offset by a loss in productivity of the capital. 

Likewise the investment of money in one's own business may offer 
an investment practically free from risk, when the effect is to reduce 
costs or provide safeguards against risks already incurred. For 
instance, when $20,000 has once been invested in the equipment of a 
plant, $500 invested in an additional machine may return much 
more than normal interest through the addition it makes to the 
efficiency of the plant, and the risk may actually be decreased by the 
new investment. In like manner, even if the $500 invested in the 
new machine has a speculative purpose, such as increase of output to 
meet a probable but uncertain demand, once the machine is bought, 
$20 expended in keeping it in repair may yield an enormous return, 
quite free from additional risk. 

Investments to start new businesses, on the other hand, are always 
speculative. Inside information or special fitness for an enterprise 
may make an opportunity almost riskless for an individual, but as a 
general rule the fact that an opportunity has not been developed 
already means that its results are uncertain. 

The purchase of high-grade bonds of industrial and public-utility 
enterprises offers a high degree of safety, chiefly because of the large 
margin which usually exists between the income required to meet 
charges on them and the normal income of the business, secondarily 
because they are usually secured by direct claims on assets of ample 
value. Here it will be noted that the investor is protected against a 
partial failure of the business. If there is a complete collapse the 
charges cannot be met, unless out of accumulated earnings of the past, 
and ordinarily the assets pledged lose much of their value. All forms 
of security depend ultimately on earning power, and are subject to 
the hazards of the business in greater or less degree. But when the 
interest on a bond requires, say 25 per cent of the anticipated earnings, 
a shrinkage of 80 per cent in net means only a 20 per cent shrinkage 
in the amount available for interest, while a 60 per cent shrinkage 



682 BUSINESS ADMINISTRATION 

leaves the bondholder unscathed. A complete failure wipes out the 
bondholder just as it does the stockholder, unless the investment can 
be extricated and the assets applied to some other use. The proba- 
bility of loss is thus roughly calculable on the basis of (a) the variability 
of the earnings, and (b) the extent of the margin of safety. The same 
considerations apply to the purchase of real-estate mortgages, and to 
loans to individuals. 

On the other hand, final equities, such as ownership of individual 
businesses or of common stocks of corporations, have their speculative 
character increased by the creation of prior liens. In the case cited 
above, the issuance of bonds sufficient to absorb 25 per cent of net 
income in fixed charges means that a 60 per cent shrinkage in net 
income cuts off 80 per cent of the stockholders' return, and a 75 per 
cent shrinkage wipes it out entirely. The thinner the equity the 
greater the risk to both parties. Common stocks, however, are always 
speculative, even if preceded by no prior liens of any kind; for the 
accumulated assets and the prospects of earnings of any business, no 
matter how stable, are always changing, and the full weight of these 
changes falls on the common stock. Prior liens intensify the risk; 
they do not create it. 

Aside from priority of lien the most important method of reducing 
investors' risk is through diversification. This is an application of 
the law of large numbers. A corporation engaging in a wide variety 
of enterprises gains stability (though it may lose in efficiency enough 
to offset the advantage of diversification). The Cities Service Com- 
pany early in 192 1 reports greatly reduced income from oil operations 
on account of the fall in the price of petroleum, but at the same time 
the largest earnings in the company's history from its public-utility 
properties. Combination of investments affords the same advantage 
to the individual investor, provided the investments are not dependent 
for their prosperity on the same conditions. Deposits of funds with 
banks, investments through building and loan associations and invest- 
ments trusts, and the purchase of insurance and of annuities, if the 
institutions are honestly managed, offer an almost perfect assurance 
of safety, largely because they depend on the success of a great number 
and variety of enterprises, some of which will almost certainly fail, 
but the great majority of which will not, unless as the result of a 
collapse of the present organization of industry. So the obligations 
of a government are better than the obligations of the business units 
controlled by that government only because the power to tax gives 



THE ADMINISTRATION OF RISK-BEARING 683 

the investor a prior lien on the earnings of these businesses, and 
because the political unit is large enough to secure to the largest 
extent the advantages of diversification. Bonds of the governments 
of highly specialized communities are risky. 



See also p. 434. Corporate Securities Viewed as Instrumentalities. 



13. INSURANCE AND RISK-BEARING 

[This selection marks the shift of the discussion over to a consider- 
ation of the transfer of risks to others, which as a rule is accompanied 
by the elimination of part or all of the risk.] 

Specialization has produced numerous types of organization to 
which it is possible to transfer certain of the risks of business. Indeed, 
specializing in risk-bearing is one of the most striking phases of our 
modern differentiation of functions and functionaries. The most con- 
spicuous illustration is of course the insurance company, but there 
are a great many others. Corporate suretyship, guaranty of real- 
estate titles, guaranteed collection services, and the hedging facilities 
offered by produce exchanges are illustrations. 

The assumption of risks for others looks at first like an extremely 
hazardous way of building an income. It is not necessarily, however, 
more risky than other forms of business enterprise, for the risk-bearer 
is usually better able to carry the risk than is the one from whom it 
is removed. This superiority may be due to superior knowledge of 
the situation, as when a title-guaranty company guarantees the valid- 
ity of a title to real estate. It may be due to superior facilities for 
preventing the harmful event against which protection is sought, as 
when a steam-boiler insurance company issues a policy to protect the 
owner of a plant and then furnishes an elaborate and efficient inspec- 
tion service to reduce the hazard of loss. Often it is due merely to 
facilities for combining large numbers of risks and thus reducing the 
area of uncertainty. For all forms of enterprise based on the assump- 
tion of risk for others, the chief hazard is not the hazard insured 
against, but the risk of failing to get sufficient business to furnish a 
working basis for the law of large numbers, or to repay the costs of 
organization. 

The business of insurance illustrates all three cases. Suppose that 
in the space of five years on an average 1 per cent of buildings of a 



684 BUSINESS ADMINISTRATION 

certain type are burned and that the cost of selling insurance, keeping 
track of the business, investigating claims, etc., together with the 
profits of the insurance company, brings the cost of insurance on such 
buildings up to 2 per cent. Suppose A insures and B refuses to do so. 
It is evident that in the long run A will pay out twice as much for 
insurance premiums as B will lose by fires. But if B has only one or 
two buildings, the "long run" necessary to make him fairly sure of 
this saving will be a great deal longer than his lifetime. Instead of 
saving the difference between the amount of the premiums and the 
average of normal loss, he gambles for the saving of a larger amount. 
If he is lucky enough to have no serious fires, he saves the whole 
premium. If his building is destroyed, he probably will never live 
long enough to save the amount lost out of his insurance premiums. 
Moreover, if he has his whole capital sunk in one building he has no 
chance to save any of the loss in this way until he has accumulated 
enough to put up another building. If the building is used for busi- 
ness purposes, moreover, its destruction is likely to mean not only the 
loss of the value of the building, but also the loss of business, goodwill 
of customers, etc. Part of this loss is unavoidable, but an insurance 
policy which enables one to rebuild quickly or to pay off debts which 
have been secured by the building may enable him to save a large 
part of this indirect loss. 

Special policies to indemnify such indirect losses as cessation of 
rent payments, stoppage of production, and in some cases anticipated 
profits, are sometimes written. These are relatively new types of 
insurance. Losses of this indirect character are not taken into 
consideration in figuring liability under the standard fire policies. 

One of the most important risks with which we have to deal is that 
which arises from the uncertainty of the length of human life. This 
takes two forms — the risk that one may live so long as to use up the 
funds which he has provided to support himself in old age and the 
risk that he may die before the end of his normal working life. Each 
contingency needs to be provided against. 

The first is taken care of in large part by the method of reserves, 
the individual setting aside a part of his earnings as a provision for 
old age, a larger part in many cases than would be necessary if the 
length of life were known. The life annuity is a special device for 
taking care of this risk. This is a contract whereby an insurance 
company or other corporation agrees for a fixed sum to pay a given 
individual a stipulated income so long as he lives. For one who will 



THE ADMINISTRATION OF RISK-BEARING 685 

live only an average period the contract is not ordinarily an attractive 
investment, but it relieves him of the risk of using up all his savings 
and coming to want because of an unexpectedly long life. The pure 
endowment is another contract which insures against a risk arising 
from the length of life. It is similar to an annuity except that the 
person taking out the contract pays his money in annual instalments 
for a term of years, and at the end of that time receives a lump sum. 
If he dies within the stipulated time nothing is paid by the company. 
Such contracts have been used in Europe by parents to provide for 
the expense of higher education of their children, or to provide dowries 
for daughters. Endowment-life policies combine pure insurance and 
pure endowment in one contract. Usually such policies are unattrac- 
tive, as the extra premium paid for the endowment feature will be 
lost in case of death within the endowment period and will earn only 
fair interest in case of survival. 

The second type of risk connected with human life is the risk of 
death before one's normal working life is completed, with consequent 
loss of earnings. The way which this risk is shifted to insurance 
companies will serve as an illustration of what we mean by the elimina- 
tion of risk through specialization and combination. For the indi- 
vidual, there is nothing more uncertain than the duration of his life. 
For the insurance company, on the other hand, the insurance contract 
involves very little risk. Which of the insured will die no man knows; 
how many will die, if the number of insured is large, can be predicted 
with great accuracy. Hence the company can profitably sell the 
insurance at a price at which it is a good bargain for the insured. 

The amount at risk on a human life at any moment is the present 
worth of the net earnings (earnings less cost of personal support) for 
the remainder of the normal working life. Stated another way, it is 
the sum of money such that if we placed it at interest and then each 
year drew out of the principal enough to bring the income up to the 
amount the insured would have earned above his personal expenses, 
the fund would just last till the time the man would normally have 
ceased to earn. The longer the period before one would normally 
cease to earn, the greater the amount lost by his death, hence a logical 
arrangement of insurance provides for a reduction of the amount 
carried as one's age advances. (In his calculation the earnings figured 
should include only those items which would actually stop in case of 
the death of the insured.) Any insurance beyond this sum is a mere 
speculation, and anything short of it means that the dependents or 



686 BUSINESS ADMINISTRATION 

business associates of the insured are carrying some risk of loss through 
his death. Strictly speaking, the adequacy of other income to support 
the family properly is not a proper test of the amount of insurance to 
be carried. A rich woman ought as a matter of business policy to be 
insured against loss upon the death of her husband so long as he is 
engaged in business and his death will result in a reduction of her net 
income. Of course, if the loss of his earnings will be fully offset by 
the saving of his personal expenses, the risk of his death involves no 
financial hazard and in that case insuring his life is merely a specula- 
tion. In general, insurance contracts as speculative investments 
where no risk is involved are very poor speculations. 

It will be noticed that when the question of insurance is put on 
the ground of financial hazard, others than his family have an interest 
in a man's life. In recognition of this principle, business firms are 
coming more and more to protect themselves against loss from the 
death of valued employees and officers. Base-ball corporations some- 
times insure the lives of their players. The Roycrofters carried a 
million dollars' insurance on the life of Elbert Hubbard. Whenever 
an individual is so valuable to his firm that the saving of his pay will 
not compensate for the loss of his services, such insurance is proper. 

Outside the fields of fire and life insurance, the most important 
branch of the insurance business is marine insurance. Newer types 
which are gaining rapidly in popularity are burglary, plateglass? 
automobile, and credit insurance. In all these cases the principle is 
the same. If a business has a large enough number of risks and if the 
risks are independent of one another, it is likely to be cheaper not to 
insure, for unless the insurance company receives a good deal more in 
premiums than it pays out for losses it cannot continue to do business. 
A railroad company need not insure its station buildings, and a large 
business owning many buildings with plate-glass windows need not 
insure them against breakage. The amount paid out in premiums 
will be greater than the amount needed to replace the damage. In 
the same way a large number of small risks of different kinds may be 
allowed to offset one another. Wherever such a distribution of risk 
cannot be secured, however, assuming that the expense loading and 
profits of insurance companies are not excessive, all insurable risks 
should be insured against, for the insurance company having a wider 
distribution of risk can definitely count on a smaller variation in the 
number of losses than can any one individual, and hence can get along 
with smaller reserves withdrawn from active business use to guard 
against the impairment of working capital. 



THE ADMINISTRATION OF RISK-BEARING 687 

The field covered by insurance companies, however, is much 
narrower than the field of risk involved in carrying on business. An 
insurance company cannot write policies to cover hazards which are 
incalculable. To meet the need for insurance or for protection 
against various types of loss where no statistics are available from 
which to calculate the expected loss, the Lloyd's type of so-called 
insurance has been developed. In. this type of contract, a large group 
of private insurers enter into a contract by which they agree to recom- 
pense the insured for his loss, dividing the cost between themselves. 
For example, people in Washington owning property along the line of 
march of the inaugural procession sometimes insure themselves, 
against loss from bad weather on the fourth of March through the 
London Lloyds. The insurers in this case do not secure a distribution 
of risk, for if they have a loss on one policy they will have a loss on 
every policy of this type. Protection against drought is of the same 
character. In these cases the insured is relieved himself of risk, but 
instead of the risk being eliminated by combination it is simply 
assumed by the insurer in what is practically a gambling spirit. So 
long as such policies are written to cover a bona fide risk and not for 
speculation, they are as useful as any other type of insurance, but the 
device obviously lends itself admirably to gambling and is often used 
for that purpose. In the earlier days of life insurance it was permis- 
sible for anyone to take out insurance on the life of anyone else, and 
policies, practically of the Lloyd's type, on the lives of public men 
were often taken out purely for gambling purposes. 

14. RISK-BEARING THROUGH SPECULATIVE 
CONTRACTS 

[The closing paragraph of the preceding selection dealt not with 
insurance, properly so called, but with a speculative contract. This 
present selection continues the discussion of such contracts.] 

A. THE TYPICAL SPECULATIVE CONTRACT OF ORDINARY BUSINESS 1 

In our contractual society, speculative contracts form one of the 
leading ways of transferring and ultimately of reducing industrial 
risks. These speculative contracts are so numerous and so well known 
that a simple illustration will suffice. I decide to build a house. 

1 Taken by permission from L. C. Marshall, "Speculative Contracts," in 
Readings in Industrial Society, pp. 501-2. (The University of Chicago Press, 
1918.) 



688 BUSINESS ADMINISTRATION 

A contractor assumes the task. He then proceeds to make sub- 
contracts with the purveyors of lumber, bricks, and other materials 
to the effect that these materials shall be delivered to him at a certain 
future time and at a certain price. The main contractor has thus 
contracted himself out of risk with reference to price changes in these 
materials. 

Our contractor has thus been relieved of much of his risk, but has 
this operated to diminish the industrial risks of society? At first 
glance it would appear that the risks have merely been shifted. The 
social significance of the operation rests in the fact that the dealers 
in lumber, bricks, and other materials are presumably specialists who 
know in considerable detail the present and probable future conditions 
in their particular industries. They are thus presumably better 
judges of the risks of those particular enterprises than the main con- 
tractor, so that when the main contractor shifts risks to their shoulders 
it probably does mean a reduction in the total risks of society. 

The foregoing illustration is typical. A man agrees to do a 
certain thing. He then contracts himself out of certain phases of the 
risks involved. True, the burden is merely transferred to someone 
else, but presumably this someone else is a specialist, and therein is 
the social defense. 

It would be quite erroneous for us to think of the speculative 
contracts involved in trading on the organized exchanges as constitut- 
ing the greater part of the speculative contracts of our day. The work 
of the organized exchanges has certain sensational elements, and 
volumes have been written upon these exchanges where sentences 
have not been written upon the vastly greater volume of speculative 
contracts entered into outside the limits of the organized exchanges. 

B. THE HEDGING OPERATIONS OF AN ORGANIZED EXCHANGE 1 

Hedging may be defined as the practice of making two contracts 
at about the same time of an opposite, though corresponding, nature 
— the one in the trade market, and the other in the speculative market. 
A purchase in the actual grain market of a certain amount of grain at 
a certain price is promptly offset by a short sale in the speculative 
market on some large exchange of the same amount of grain for some 
convenient future month's delivery, with a view to cancelling any 

1 Adapted by permission from S. S. Huebner, "The Functions of Produce 
Exchanges," Annals of the American Academy of Political and Social Science, 
XXXVIII (ion), 342-49- 



THE ADMINISTRATION OF RISK-BEARING 689 

losses that might result from fluctuations in price. As soon, however, 
as the trade transaction is terminated by a sale, the speculative short 
sale must also be terminated, i.e., covered by a purchase on the 
exchange. Both contracts are entered into at about the same time, 
and both must be terminated at about the same time if the hedger 
wishes to avoid speculation. 

In explaining this process of hedging let us consider the needs of 
a grain dealer, who, for example, purchases 1,000,000 bushels of wheat 
in August at $1.00 a bushel; and who, as is a customary practice, has 
made this purchase with borrowed funds to the extent of 90 per cent 
of the purchase price, the banker holding the grain paper as collateral 
for the loan. The banker is protected because he knows that at any 
time he can, owing to the existence of a large continuous market, sell 
out the buyer. But what shall we say of the grain dealer's risk? 
Is he not running a tremendous risk by buying so much wheat on a 
10 per cent margin when in the course of a week or two, owing to 
world-wide conditions over which he has no control, wheat may 
decline from 10 to 20 cents per bushel? If there were not some way 
in which he can insure himself against such a contingency it would be 
doubtful if our large elevator companies could remain in business for 
any length of time, especially with their trade profit, under present 
competitive conditions, limited to one or two cents per bushel. In 
fact the leading interests in the grain business have testified before 
Government Committees that hedging is absolutely necessary to 
enable them to continue in business, and here it may be repeated that 
a hedging operation cannot be conducted without executing a short 
sale. 

Now just as soon as the grain dealer purchases the wheat in the 
actual wheat market he at once gives an order to sell short on some 
exchange an equal amount in the speculative market for, let us say, 
September delivery. These two transactions are entirely distinct. 
The grain dealer does not intend to deliver the wheat he actually 
holds in fulfilment of this short sale. Now let us suppose that wheat 
rises to $1.10 per bushel. In that case he has a profit of 10 cents per 
bushel on the wheat he owns, since he purchased it at $1.00. But, 
as we have seen, the price of wheat is a world price made such by the 
operation of arbitrageurs, and there is every reason to believe that if 
the price of cash wheat rises 10 cents a bushel the September option 
will also have a rise of 10 cents, or approximately that amount. 
Since the grain dealer sold short an equal amount in the speculative 



690 BUSINESS ADMINISTRATION 

market he suffers a loss on that transaction of 10 cents per bushel. 
The profit on his trade transaction is cancelled by his loss on the paper 
transaction. On the other hand, supposing that wheat declines 10 
cents per bushel, the grain dealer loses 10 cents upon his trade wheat, 
but the 10 cents lost here will be cancelled by the 10 cent rise on the 
short transaction. In other words, whether wheat should rise to $2.00 
a bushel or decline to 50 cents a bushel, this dealer is always even as 
regards the given market. Whatever he makes by price fluctuations 
on the wheat he holds is lost on his paper transaction and vice versa. 
If, when September arrives, he finds that circumstances are such as 
to make it necessary or desirable to hold his wheat longer, he may 
close out his September short sale in the speculative market and at 
once enter into another sale for a later month. This shifting of hedg- 
ing transactions from one month to another month is a very common 
practice, although where the party interested is not the holder of a 
seat on the exchange, it involves accumulating commission charges. 

The question will at once be asked, since the dealer is always even, 
how does he make his profit? Here we must distinguish clearly 
between the trade profit and the speculative profit. This grain dealer 
wishes to avoid speculative risks and therefore makes use of the 
speculative market for the purpose of hedging. His business consists 
in conveying his wheat, let us say, from Chicago to New York, and 
it is in the handling and transportation of the grain from this market 
to another market that he expects to make a trade profit, which is the 
result of his knowledge of the business and his ability to render this 
particular service in competition with other dealers. 

The explanation given here will apply differently in different 
industries to meet the needs of those who wish to use the exchange 
for hedging purposes. 

C. SOME DANGERS OF THE SPECULATIVE CONTRACT 

The same possibility of using a contract either for the purpose of 
hedging a legitimate risk or for the purpose of creating a gambling 
risk which we saw in the Lloyd's contracts arises in connection with 
"future contracts" on the produce exchanges. When a grain mer- 
chant sells a future contract to hedge against a fall in prices while he 
is marketing his purchases of cash grain, or a flour miller buys a future 
contract to protect himself against loss while he is manufacturing 
flour which he has agreed to deliver, they are securing protection 
against a definite risk in much the same way that one secures protec- 



THE ADMINISTRATION OF RISK-BEARING 691 

tion against unknown hazard through Lloyd's policy, but in both 
cases the only way that the insuring or hedging individual gets rid of 
his risk is by transferring it to someone else who assumes it as a 
speculation. The whole machinery of the produce exchange finds its 
justification in the facilities which it affords for carrying on certain 
types of business with a minimum risk and consequently at a minimum 
cost. There is no question that it is sound business policy to make 
use of the hedging market wherever a hedging contract can be secured 
on reasonable terms, but the existence of a hedging market presupposes 
the existence of a group of speculators who are taking the risk off the 
business man's shoulders, and there has as yet been found no way to 
prevent these contracts being bought and sold in a purely gambling 
spirit. A, the speculator, in relieving B of risk certainly performs a 
valuable service for society, but A does not know whether he is reliev- 
ing B of risk or buying contracts from C who is speculating on the 
opposite side of the market, and if the result is to impoverish A or to 
bring him unexpected " easy money " the effect is quite as demoralizing 
as when similar occurrences take place through the medium of the 
race course or the roulette wheel. 

In any case it is clear that the mixing of speculation with other 
types of business is likely to be bad for the other business. No 
business man thinks of employing his surplus funds during a slack 
season in writing insurance policies on his friends' property, and the 
employment of surplus funds in speculation by business men in general 
in order to furnish other business men with protection against price 
fluctuations is quite as unsound. This is true, not so much because 
the man who speculates as a side line lacks expert knowledge, but 
simply because it diverts energy and time from the principal business 
into the side line, and, more important, creates a new and unnecessary 
hazard affecting the working capital of the principal business. Society 
needs speculators, but the proper source for speculative funds is the 
accumulation of surplus funds in the hands of those who are not 
actively engaged in other business and can afford to take a series of 
losses without flinching in the expectation of making it back in the 
long run. The great weakness of present-day speculation is that there 
are too many people furnishing speculative contracts who, either on 
account of the needs of their other lines of business or on account of 
absolute limitation of funds, cannot stick through the long run 
and are "wiped out" by the first or second unexpected turn of the 
market. 



692 BUSINESS ADMINISTRATION 

15. GUARANTY, SURETYSHIP, AND UNDERWRITING 

The type of specialization which involves the assumption of risk 
by a specialist who believes that he can foresee the outcome of a 
venture and decides that there is no risk, or a smaller risk than is 
generally estimated, finds most of its illustrations in speculation. 
Outside this field illustrations are found in contracts of guaranty and 
suretyship and in certain types of so-called insurance which are really 
more properly considered as surety arrangements. For instance, a 
title insurance company guarantees real estate titles, not by figuring 
the percentage of losses and calculating a premium to cover the risk, 
as is the insurance practice, but by searching the records until it is 
satisfied that no risk exists. For the private individual who cannot 
conduct this investigation for himself, the contract removes an impor- 
tant risk ; for the company the risk is negligible. So with individual 
guaranties. When a friend signs a card to enable you to draw books 
from the municipal library, he does not inquire what per cent of 
guarantors are called upon to make good the losses sustained by the 
library; he depends absolutely upon your performing your obliga- 
tions, though he is doubtless aware that some people do not do so. 
He knows you are individually a safe risk, whatever the average may 
be. The library, not knowing this, considers that the guaranty 
reduces a real risk. In the same way, when A indorses B's note as 
an accommodation he may know perfectly well that 1 per cent of the 
business men in the United States are likely to fail within a year, but 
he does not figure that he is running a 1 per cent risk; he believes B 
is all right and will not be among the 1 per cent. If he had any doubt 
about it he would probably decline to furnish the indorsement. A 
bank acceptance is exactly the same sort of transaction. The bank 
accepts drafts drawn on it on account of a customer, depending on 
him to provide the necessary funds before the draft falls due. It does 
not charge an actuarial premium based on statistics of risk; it merely 
charges a commission for the service. Unless it considers itself safe 
it does not accept the draft. To the drawer of the draft, who does 
not share the bank's knowledge or its confidence in the customer's 
reliability, the bank's acceptance makes the transaction less risky. 

In foreign-exchange transactions certain individuals or firms of 
excellent standing buy the paper of small firms which have not estab- 
lished their reputation, add their own indorsement and resell the paper 
in the open market at a higher price. They know, or at least they are 
convinced, that the less known firms are sound; but the general 



THE ADMINISTRATION OF RISK-BEARING 693 

public not being so fully informed, the well-known indorsement adds 
to the market value of the paper. Here again we have a reduction 
of risk through specialization in securing more adequate information 
than is generally available. 

16. ORGANIZED SURETYSHIP 1 

The business of suretyship as defined in the insurance law of 
New York is: 

1. Guaranteeing the fidelity of persons holding positions of public 
or private trust. 

2. Guaranteeing the performance of contracts other than 
insurance policies. . 

3. Executing or guaranteeing bonds or obligations in actions or 
proceedings or by law allowed. 

It will be seen from this that, in a general way, except as to 
insurance policies, a surety company may, and generally will guarantee 
that a particular principal will do any lawful thing specified, provided 
the security is satisfactory to the surety company and a reasonable 
compensation is paid. To really understand suretyship, one must 
separate fidelity insurance from the other branches. Fidelity insur- 
ance is handled as any other line of casualty insurance would be. 
and while reliance is placed upon salvage, nevertheless the real reliance 
is upon the fact that only a certain very small proportion of men are 
likely to be dishonest. It is accordingly underwritten as an insurance 
proposition. All the other fines, sometimes specifically spoken of 
collectively as surety fines, are, however, underwritten upon the 
theory that there is a sound and competent principal who will perform 
the condition of the bond; and the surety does not seriously contem- 
plate the possibility of being required to pay the bond, but considers 
that what he furnishes in return for the fee paid is merely a service. 
In other words, by signing the bond as surety, he extends credit to 
the principal. Suretyship is just as much the granting of credit as is 
banking, the only difference being that the bank furnishes to its 
customer the use of current funds, while the surety furnishes its 
customer with the opportunity to do something which he otherwise 
would not be able to do, or enables him to avoid the necessity of doing 
something until the contingency occurs which makes it certain he 
must do it. 

1 Adapted from advertising literature published by The American Surety 
Company, New York, 19 19. 



694 BUSINESS ADMINISTRATION 

For convenience, suretyship has been divided into certain general 
classes, some of which are not at all likely to be required in connection 
with foreign commerce, but the following lines are all quite likely to 
be needed by anyone transacting business abroad 

Fidelity (All Classes) Court 

Fiduciary License, Franchise and 

Customs and Internal Revenue Permit 

Contract Lost Security 

Depository Lease 

17. THE PLACE OF RISK-BEARING IN A BUSINESS 

ORGANIZATION 1 

An organization chart of a manufacturing and selling business is 
quite certain to have a place for many of the relationships which have 
been discussed in this book. There will be a works manager, a 
purchases manager, a sales manager, a finance manager, and fre- 
quently a personnel manager. These personages may or may not 
have the precise titles here used, but no one at all conversant with 
business organization would expect to see them omitted from the 
organization scheme, nor would he be in doubt concerning the main 
outline of their duties, no matter what titles were used. 

But where on the organization chart is the risk-bearingf unctionary ? 
In few cases does he appear on the chart with any such title attached 
as enables one to locate him readily. In the financial section of the 
organization chart there is sometimes a functionary who handles the 
insurance matters of the business, or in rare cases such a functionary 
is placed in the personnel department when the business has adopted 
some comprehensive policy of insuring its workers, or of insuring 
itself against claims by its workers for compensation because of acci- 
dents. These functionaries sometimes bear titles which indicate even 
to laymen that they are connected with the manager's relationship to 
risk and risk-bearing. In the main, however, no " risk-bearing 
manager" has yet been split off from the general manager and he does 
not seem likely to be split off in the near future. The nearest approach 
to a separate risk manager is to be found in those organizations which 
have set up comprehensive research bureaus. They are, clearly 
enough, aiming at the elimination of certain risks, or uncertainties, 
which have been confronting the business. Then, too, many busi- 

1 By L. C. Marshall. 



THE ADMINISTRATION OF RISK-BEARING 695 

nesses have bureaus designed to eliminate risks by preventing the 
harmful event. A safety engineering bureau devoted to diminishing 
accidents among employees is a case in point. There is, however, no 
knitting together of all the risk functionaries in a business into a 
definitely organized bureau or department which deals with risk- 
bearing in any way comparable to the way in which the production 
department deals with production. And this is not very surprising. 
Risk is uncertainty and it is natural for the owner-manager to keep 
definitely under his own personal control the administration of his 
relationships to uncertainty. It is a hard matter to delegate it. 

Even where the manager is not also an owner, as may well be 
true of the general manager of a modern corporation, the administra- 
tion of risk cannot well be delegated to some specialist subordinate 
manager of risks. Good administration of risks is pretty certain to 
require the wide knowledge and maturity of judgment of the general 
manager himself. This follows from the very nature of business 
problems and of business judgment formation. 

REFERENCES FOR FURTHER STUDY 

Duncan, Commercial Research. 

Emery, Speculation on the Stock and Produce Exchanges of the United 
States. 

Gephart, Principles of Insurance. 

Huebner, Property Insurance. 

Marshall, Readings in Industrial Society, chap. viii. 



CHAPTER VIII 

THE FORM OF THE BUSINESS UNIT 

Purposes of this chapter: 

i. To get an understanding of the various forms of the business 
unit as organization devices of which the administrator makes use. 

2. To see these various forms as alternative elastic " containers" 
for the relationships thus far sketched in this volume. 



In the preceding chapters we have surveyed five of the more 
outstanding relationships of the administrator — personnel, market, 
finance, technology, and risk. In each of these chapters we have 
seen the character of the problems the administrator is called upon 
to solve and have canvassed some of the materials of solution. In 
every case we have examined, if only hastily, the organization set up 
within businesses to deal with the specialized problems we have 
considered. 

Now that we know what the outstanding managerial problems 
are, we pass in this chapter to an inquiry into appropriate "con- 
tainers" for them — that is to say, we now examine the various forms 
of the business unit, in order to see when the individual proprietorship 
is appropriate; when the partnership; when the corporation; when 
some other form. 

Probably it is fair to say that our prime concern in this chapter 
is that of getting a point of view. Our secondary concern is that of 
storing up in our minds certain factual material. 

The point of view is similar to that expressed when we were study- 
ing corporate securities in chapter v. There is little use in trying 
to memorize the characteristics of the various forms of the business 
unit. Indeed, their characteristics cannot be sharply defined. There 
is no human being who can set forth precisely and at all points wherein 
an individual proprietorship differs from a partnership. A corre- 
sponding statement may be made of the partnership, the joint stock 
company, the corporation, and other forms. These forms shade off 
into one another. They are "containers" and elastic containers, at 
that. They are shaped and molded to meet business needs; business 
needs are not squeezed into cut and dried forms of the business unit. 

696 



THE FORM OF THE BUSINESS UNIT 697 

Now this does not mean that it is a mistake to speak of business 
units as being of various types or forms of organization. It does 
mean that we must be careful to remember that they are flexible 
types. 

We shall proceed in our study of these types as follows: first, we 
set up (Selection 1) some tests of the efficiency of the different forms of 
the business unit and secure some idea of the relative importance 
(Selection 2) of the three leading forms — the individual proprietorship, 
the partnership and the corporation. Then in Selections 3 to 19 we 
canvass the more usual features of the following quite incomplete list 
of forms of the business unit: the Individual Proprietorship, the 
Agency, the Ordinary Partnership, the Limited Partnership, the Part- 
nership Association, the Corporation, the Business Trust, Consoli- 
dated Industry, Co-operative Industry. 

The individual proprietorship will probably give us little trouble. 
All of us already have a considerable mass of general information 
concerning it and Selection 3 will clarify this information and make it 
specific. As for the other forms, in which there is association of two 
or more persons, we may the more readily thread our way through 
the maze of details if we bear in mind that the law, in its effort to 
give certainty to business relations, seeks to clarify two sets of relation- 
ships: (a) the relationships of the associates among themselves 
(inter se) and (b) their relationships to others (third parties). We 
shall find, as we go along, that part of this is cared for in the common 
law (this is markedly true of the agency and the partnership) and 
that another part has called for statute law as a means of making 
relationships certain. 

Under the common law, an agent who acts within the scope of 
his authority binds his principal as truly as if the principal were 
himself acting. This means, of course, that unless the principal 
(or his agent) limits his liability when forming a contract, the liability 
is unlimited. Just here we have an explanation of some of the out- 
standing features of the partnership, for in the ordinary partnership 
all partners are principals and all are agents — there is "mutual 
agency," and unlimited liability for every partner. 

Notice that this gives third persons dealing with a partnership a 
clear understanding concerning what to expect. Upon the one hand, 
unless these third persons are specifically warned to the contrary by 
the terms of the contract, they may hold all partners unlimitedly 
liable. Upon the other hand, the partners may contract among 



698 BUSINESS ADMINISTRATION 

themselves in any lawful way concerning management and indeed 
concerning who will, so far as they are concerned, assume the position 
of first risk. But such agreements inter se will not operate to limit 
the claim of third persons unless the third persons are aware of the 
situation and consent thereto. 

As time has gone on, certain rules of the game have been evolved 
by society with respect to what will constitute making third persons 
"legally aware" of certain matters, as for example limitation of 
liability on the part of some or all of the partners. Mainly, these 
rules have taken the form of statute law which sets forth that, under 
such and such conditions, any third person who deals with a given 
kind of business association does so with the understanding that there 
is limitation of liability. These conditions will be such as seem to 
the legislature wise. They may provide that the word "limited" 
shall be used after the firm name; they may insist that a record shall 
be set up in some county courthouse or in some state office; they may 
demand publication in newspapers concerning the organization of 
such a company; they may do any reasonable thing by way of giving 
warning to third persons, and what is actually done varies from state 
to state. There is no use trying to memorize details. What the law 
seeks to accomplish is that third persons shall have "due notice" and 
the legislature is, speaking broadly, the judge (within reasonable 
limits) of what constitutes due notice. 

What has just been said is as true of the corporation as it is of the 
various forms of the "limited" partnership. In the corporation, 
however, a new element comes to the front. As we know, the law 
makes an artificial person of the corporation and those associated in 
such a venture have their relationships inter se fixed, not by contracts 
among themselves, but by their contracts with this artificial person. 
Again, as we know, these contracts are ordinarily worked out through 
those devices we call stocks and bonds. This artificial person then 
deals with "third parties" and it is unlimitedly liable to these third 
parties unless its liability is limited in its contracts with these third 
parties. It is the liability of the owners which is limited and the 
extent to which it is limited depends upon the terms of their contracts. 
We already know (see page 436) that this artificial person must act 
within the rules laid down by its creator, the state. It should be 
clear furthermore that its owners have those rights, duties, and 
obligations which are set forth in their contracts with the corporation 



THE FORM OF THE BUSINESS UNIT 699 

and that these vary from state to state, from corporation to corpora- 
tion, and from contract to contract. 

Perhaps it is worth while to summarize what has been said thus 
far in a series of propositions. 

1. The tests of efficiency of the forms of business organization 
cannot be applied with understanding without some knowledge of 
social control in its relationship to the form of the business unit. 
The form of social control of prime interest to us in this connection 
is law, which is of two main kinds, (a) common law and (b) stat- 
ute law. 

2. Since the individual proprietorship (in its pure form) means 
that there is but one person responsible, the law involved in his case 
has to do with his relations to others. It is largely common law. 

3. In those forms of the business unit where there is an association 
of two or more persons, the law is concerned with two matters, 
(a) the relationships or the rights, duties, and obligations of the 
associates among themselves (inter se) ; (b) their relationships to others 
(third persons). 

4. In theory at least, the law seeks to promote the welfare of 
society by giving "certainty" to these relationships so that all con- 
cerned may proceed about their affairs with confidence. 

5. These relationships are in very large part contractual (the 
expression "this is a society of contractual relationships" ought to 
be assuming a large meaning to you), and they may accordingly 
have almost infinite variety. Just what these relationships shall be 
(1) depends upon the terms of the contract and (2) that depends 
upon the law of the land. 

6. The forms of the business unit which have actually come into 
common use have arisen as means to the accomplishment of certain 
business ends. They can be better understood when studied with 
this in mind. It is of little value to try to memorize a list of these 
forms and the attributes applicable to each. Instead, try to realize 
that the forms are varying methods of fixing relationships (1) inter se 
and (2) with third persons. 

7. Many puzzling details cease to puzzle if you keep in mind that 
one outstanding problem is that of letting third persons know the 
rights, duties, and obligations of those with whom they are dealing. 
Of course it could be done by having every such "deal" covered by a 
contract setting forth the whole story. This would be cumbersome 



700 BUSINESS ADMINISTRATION 

however and instead we commonly resort to some scheme of "public 
notice" of the situation, and after that notice has been given, third 
persons are assumed to know the situation, and to govern themselves 
accordingly. This statement applies particularly to "limited" 
partnerships and to corporations. 

PROBLEMS 

i. How can it be said that the corporation is the most significant form of 
the business unit when only 28.3 per cent of the manufacturing establish- 
ments of 19 14 were corporations whereas 51.6 per cent were individual 
proprietorships ? 

2. Draw up a series of generalizations based on the table in Selection 2. 

3. Survey the tests of efficiency set forth in Selection 1 and estimate the 
value of the individual proprietorship with respect to each. 

4. Why does the individual entrepreneur still remain dominant and almost 
without corporate rivals in the field of agriculture ? 

5. Why is it reasonable that an agent, acting properly within the scope of 
his agency, should be able to "bind" the principal? 

6. Why is it reasonable that an agent who does not act within the scope 
of his agency does not bind the principal ? What can the third person 
do about it ? 

7. Why is it reasonable that the death of either principal or agent 
terminates the agency ? 

8. How can a third person know whether an agent is acting within the 
proper scope of his authority ? 

9. As a usual thing, is an individual proprietor "unlimitedly liable"? 
Is the principal unlimitedly liable for the acts of an agent ? 

10. Could an individual proprietor limit his liability to A by drawing a con- 
tract with A in which the limitation is clearly set forth? Could he 
limit his liability in his entire business by having such contracts with 
all persons ? 

11. Answer the foregoing question with respect to the limitation of liability 
of a principal. 

12. Suppose the state should pass a law that, if an individual proprietor 
wore a dress suit and had a red chalk mark on his forehead when 
transacting business face to face with people these facts should con- 
stitute public notice that his liability in these transactions was limited. 
Would he have limited liability? If so, on what theory? 

13. In the ordinary partnership every partner is both a principal and an 
agent. What does this mean with respect to liability ? 

14. Suppose the state should pass a law saying that it should be public 
notice of limitation of liability if a partnership should paint a red 
elephant over the door of its place of business and should have a red 



THE FORM OF THE BUSINESS UNIT 701 

elephant printed on all its business paper. What would be the position 
of third persons dealing with such a firm, assuming that the courts 
uphold this law ? 

15. Could an ordinary partnership limit its liability by putting a limita- 
tion in every contract into which it entered ? 

16. Could the members of an ordinary partnership contract among them- 
selves settling how the administrative organization of the firm should 
be constituted (e.g., A to handle sales; B, personnel, etc.) ? 

17. Could the members of an ordinary partnership contract among them- 
selves that A (one of the partners) should never deal with third persons ? 
Suppose they could and that A, breaking his contract, dealt with third 
persons. Did this bind the firm ? 

18. In an ordinary partnership, do partners share losses and gains 
equally ? 

19. A, B, and C are partners. C dies and leaves his estate to his son E. 
What rights has E ? In answering this remember that the law thinks 
of agency as a highly personal relationship. For example, the death 
of either principal or agent terminates an agency. 

20. A, B, C are partners. C sells his interest to D. What rights has D ? 
In what ways may a partnership be terminated ? 

21. In the eyes of the law two persons may actually be engaging in opera- 
tions as partners and yet not be aware of the fact. How do you explain 
this? 

22. In what respects does the mining partnership differ from the ordinary 
partnership ? Why ? 

23. Who directs the business in a limited partnership ? Who in a partner- 
ship association ? How can the general public know about the limited 
partner ? Can a special partner transfer his interest ? What are the 
essential steps in the formation of a partnership association ? Is there 
any particular requirement with reference to the firm name? How 
are shares transferred? What general answer should be made to all 
such questions concerning specific details? 

24. Could a state pass a law providing for corporations whose stockholders 
should have unlimited liability ? 

25. Could a state pass a law laying down the rules for forming the 
administrative organization of corporations ? 

26. "By becoming a body corporate, an association gets simply the right 
to be regarded, in its legal relations, as though it were a being separate 
from those who compose it." What consequences flow from this fact ? 

27 "It is not true that the corporation has limited liability. Its liability 

is unlimited." Is this true? 
28. From the legal point of view, what documents, in order of authority, 

determine the powers of a corporation ? Do the powers of a corporation 

depend in any part upon common law ? 



702 BUSINESS ADMINISTRATION 

29. What is a special charter? What does a charter usually contain? 
What do the by-laws usually contain ? 

30. Discuss the directors of a corporation with particular reference to the 
following points: number, authority, qualifications, liabilities, com- 
pensation. 

31. " The following are the rights which stockholders as a body are usually 
said to possess: (a) to elect directors; (b) to amend the charter or 
by-laws; (c) to sanction or veto the selling or mortgaging of the per- 
manent assets of the corporation; (d) to dissolve the company; (e) to 
sell the entire assets of the company; (/) to exercise any powers specially 
conferred by the charter." 

What is the significance of the expression "as a body" ? Do the stock- 
holders always have these powers ? Are these powers unlimited powers? 

32. What special limitations are likely to be placed by law upon public 
service companies? On what theory are these limitations imposed? 
What are the tests of a public service industry ? 

33. " The stockholders are usually said to be liable: (a) to the corporation 
or to its creditors on account of unpaid stock; (b) to creditors if 
dividends have been paid out of capital assets ; (c) to such persons and 
in such ways as may be indicated by the law of the state." 

Explain and justify each of these kinds of liability. Under (c) cite 
some specific cases. 

34. "The Kennebec Lumber Company was chartered to deal in lumber. 
At a stockholders' meeting, which all the twenty stockholders of the 
company attended, a resolution was passed by a vote of 2,971 shares 
of stock to 29 to build a plant for manufacturing paper. Grimes, the 
lone dissenting stockholder, sought an injunction from a court of 
equity to prevent the erection of the paper manufacturing plant." 
Should the injunction be granted ? 

35. What considerations should have weight in determining in what state 
a company should be incorporated ? 

36. In what ways may a private corporation be terminated ? 

37. Is the credit of a partnership higher than that of a corporation, other 
things being equal ? 

38. Why have we had the "combination movement" in modern business ? 

39. The following list of factors determining the scale of production has 
been made: (a) with respect to producing or manufacturing; (1) material, 
(2) labor, (3) processes, (4) administration; (b) with respect to market- 
ing: (1) extent of market, (2) the product, (3) the character of the 
demand, (4) administration, including price policies; (c) with respect to 
administration: (1) the entrepreneur and his qualities, (2) the form 
of organization, (3) the adjustments with the rest of society; (d) with 
respect to certain external factors: (1) co-operation of business agencies, 
e.g., banking, insurance, (2) social control. 



THE FORM OF THE BUSINESS UNIT 703 

Can you explain the significance of each item ? What has this to do 
with the form of the business unit ? 

40. Suppose that someone should discover or invent a way of producing 
power in small units, as cheaply as it is possible to produce it in large 
units. Would production on a large scale continue to dominate modern 
industry? Would such an invention be likely to affect the relative 
importance of the variou? forms of the business unit ? 

41. Can you make a general statement concerning the relationship of the 
size of business to its form ? 

42. What seems to be the future field of the partnership? Indicate 
precisely* why. 

43. Draw up in parallel columns: (a) the advantages and disadvantages of 
the individual firm; (b) the advantages and disadvantages of the 
agency; (c) the advantages and disadvantages of the partnership; 
(d) the advantages and disadvantages of the corporation; (e) the 
advantages and disadvantages of the joint stock company. 

44. How do you think of the various forms of the business unit ? Are they 
capital-forming devices? Are they organizing and administering 
devices ? 

45. Is the co-operative enterprise a new form of the business unit? 

46. Notice again the tests of efficiency of business organization in Selection 1. 
Try to rank the various forms of business organization with respect to 
each of those tests. 



1. THE TESTS OF EFFICIENCY OF FORMS OF THE 

BUSINESS UNIT 1 

What have been the tests of efficiency which have determined 
the development and survival of the different forms of business 
organization ? What are the tests for judging their relative efficiency 
to-day? The general test of economy is too indefinite for easy 
application. We may subdivide it into some five or six more par- 
ticular and specific tests, as follows: 

1. Facility of formation. — At the outset, the question of the 
ease of setting up in business differentiates one form of business 
organization from another. Aside from the question of raising 
capital, which is to be made a distinct test, there are questions of 
suitable associates, of expense, legal restrictions, etc. The problem 
of promotion is a big one nowadays, and one of the promoter's usual 
duties is to devise a suitable organization for his enterprise. 

1 Adapted by permission from L. H. Haney, Business Organization and Combi- 
nation, pp. 35, 36. (The Macmillan Company, 1904.) 



704 BUSINESS ADMINISTRATION 

2. Amount of capital. — With the growing importance of capital 
in production, it has become increasingly essential that the form 
of business organization shall be one that facilitates the acquisition 
of large amounts of that factor. To this end it must afford a maxi- 
mum degree of security, and appeal widely to the investing class. 
To be sure, where small capital is required, other tests may decide, 
but the preceding statement holds for industry as a whole. 

3. Liability. — Closely connected with the subject of capital is 
the liability point. Risk is one of the chief elements in all business, 
and the form which will reduce risk to the minimum will most appeal 
to business men, when other things are equal. A certain amount 
of liability is essential in order to secure a proper motivation and 
direction of industry, and to insure those who deal with the business 
organization of fair treatment; but any greater liability than will 
attain these ends is undesirable from all points of view. Liability 
may be of two kinds: financial and legal. The former concerns 
economic responsibility in case of insolvency; the latter concerns 
juristic responsibility for criminal and civil offenses. 

4. Direction. — Assuming that the capital has been raised, what 
efficiency will the form of organization, within which it is combined 
with the other factors, afford? The test of effective direction is in 
reality to be reduced to several subordinate tests. First, there is 
motivation, which concerns the intensity and directness of the 
stimulus to business activity. Then there are economy of operation, 
continuity of policy, flexibility of organization, to mention the more 
important points. By flexibility is meant adaptability to changing 
conditions, such adaptability being needed now for capital, now for 
membership, and again for centralization of management. 

5. Endurance and stability. — The degree of permanence of the 
various forms of organization varies considerably, and this is a 
matter of no small importance. It is important to the individual 
to be able to lay business plans for the future and to make invest- 
ments running for considerable periods of time. To the society it is 
important that some agency should exist for continuing in uninter- 
rupted life the undertakings upon which its members depend for 
the satisfaction of their economic wants. In order to satisfy these 
needs the organization must both be able when undisturbed to last 
through a long period of time, and also to resist temporary disturbing 
influence, that is, be stable. 



THE FORM OF THE BUSINESS UNIT 705 

Finally, (6) a legality test may be mentioned. In every civilized 
society there is a changing body of legal rules which must be observed 
if the form of organization is to be most effective. A form of organi- 
zation like the trust, for example, is obviously inexpedient because 
of legal conditions. Thus the law reacts upon economy. Indeed, 
from the association standpoint the various forms of business organi- 
zation are, as such, children whose father is economic expediency 
and whose mother is the law. 

That the foregoing tests may be applied both from the point of 
view of the individual — the "private point of view" — and from 
the point of view of society — the " public point of view" — must 
ever be borne in mind. 

2. RELATIVE IMPORTANCE OF THE MAIN FORMS OF 

THE BUSINESS UNIT 

A. THE POSITION OF THE CORPORATION 1 

One of the striking features of the evolution of modern industrial 
society has been the development of the corporation. The statistics 
in this field are of such very recent origin that, except for the last few 
years, no quantitative study of the growth of this form of organization 
can be presented which can lay any claim to accuracy. From the 
United States Census we find that, during the decade 1899-1909, the 
fraction of the mineral output produced by corporation-owned mines 
increased from about 85.0 to 92.2 per cent, while, in the manufactur- 
ing field, during the same period, corporations increased their share 
of the value added by manufacturers from approximately 63.3 to 
77.2 per cent. We know that transportation by water, rail, and wire 
has been mainly carried on by corporations for several decades. In 
commercial enterprises, the general impression is that the stock com- 
pany is gradually playing a more important part than formerly. Only 
in the field of agriculture does the individual entrepreneur — the man 
who controls and directs his own business — still remain dominant and 
almost without corporate rivals. A rough estimate indicates that, 
of the total products of American industry in 1899, some 39 per cent, 
or approximately seven billion dollars' worth, and, in 1909, about 
44 per cent, or thirteen billion dollars' worth, were turned out by 
corporation-owned plants. 

1 Adapted by permission from W. I. King, The Wealth and Income of the 
People of the United States, pp. 208-11. (The Macmillan Company, 1915.) 



706 



BUSINESS ADMINISTRATION 



B. RELATIVE IMPORTANCE IN MANUFACTURING INDUSTRY 1 

Statistics concerning the character of ownership or legal organi- 
zation of manufacturing enterprises are given in the table below 
for all industries combined. The table shows for the censuses of 
1914, 1909, and 1904 the number of establishments under each form 





NUMBER 


WAGE-EARNERS 


VALUE OF PRODUCTS 


CHARACTER 




Per 




Aver- 




Aver- 


Per 


OF 




Cent 




age 




age 


Cent 


OWNERSHIP 


Estab- 


Dis- 


Average 


per 




per 


Dis- 




lishments 


tri- 


Number 


Estab- 


Amount 


Estab- 


tri- 






bu- 




lish- 




lish- 


bu- 






tion 




ment 




ment 


tion 


All classes: 
















1914 


275,791 


100. 


7,036,337 


25-5 


$24,246,434,724 


$87,915 


100. 


1909 


268,491 


100. 


6,615,046 


25.0 


20,672,051,870 


76,993 


100. 


1904 


216,180 


100. 


5,468,383 


25.0 


14,793,902,563 


68,433 


100. 


Individuals: 
















1914 


142,436 


51.6 


707,568 


5.° 


1,925,518,298 


I3,5i8 


7-9 


1909 


140,605 


52.4 


804,883 


6.0 


2,042,061,500 


14,523 


9.9 


1904 


113,946 


52.7 


755,923 


7.0 


1,702,830,624 


14,944 


11. 5 


Corporations: 
















1914 


78,151 


28.3 


5,649,646 


72.0 


20,181,279,071 


258,174 


83.2 


1909 


69,501 


25-9 


5,002,393 


72.0 


16,341,116,634 


235,121 


79.0 


1904 


51, 097 


23.6 


3,862,698 


76.0 


10,904,069,307 


213,399 


73-7 


All others: 
















1914 


55,204 


20.0 


679,123 


12.0 


2,139,637,355 


38,835 


8.8 


1909 


58,385 


21.7 


807,770 


18.0 


2,288,873,736 


39,203 


11. 1 


1904 


5i,i37 


23-7 


849,762 


21.0 


2,187,002,632 


42,768 


14.8 



of ownership, the average number of wage-earners, and the value of 
products for the establishments in each group. In this and the other 
tables presenting the statistics of ownership the group "All others" 
includes establishments operated by firms, co-operative associations, 
and miscellaneous forms of ownership that could not be classed as 
"Individuals" or "Corporations." 

Establishments under individual ownership are more common 
than those under any other form, representing in 1914 more than 
half of the total number in all industries combined. The value of 
products, however, reported for such establishments, represents but 
7.9 per cent of the total. 

The most important distinction shown is that between corporate 
and all other forms of Ownership. Of the total number of establish- 
ments reported as engaged in manufacturing industries in 19 14, 
28.3 per cent were under corporate ownership. The corresponding 
figure for 1909 was 25.9, and for 1904 was 23.6 per cent. While 

'Adapted from The Abstract of the Census of Manufactures, 191 4, pp. 374, 
385 and Thirteenth Census of the United States, VIII, 135 ff. 



THE FORM OF THE BUSINESS UNIT 707 

corporations thus controlled only about one-fourth of the total 
number of establishments, they gave employment to a large propor- 
tion of all wage-earners reported, namely, 80.3 per cent in 1914, 
75.6 per cent in 1909, and 70.6 per cent in 1904. The value of 
the products of the factories operated by corporations represented 
83.2 per cent of the total value of products for all establishments in 
1914, 79 per cent in 1909, and 73.7 per cent in 1904. These figures 
show that during the decade the corporate form of ownership in- 
creased so greatly that it represented an appreciably larger propor- 
tion of the manufacturing interests of the country in 19 14 than in 
1904. 

As a rule, the larger the average size of the establishments in an 
industry, the higher is the proportion of establishments controlled by 
corporations and the proportion of business done by corporations. 
In the industries included under the designations "cars and general 
shop construction and repairs by steam-railroad companies" (steam- 
railroad repair shops) and "cars and general shop construction and 
repairs by street-railroad companies" (street-railroad repair shops) 
all but one of the establishments in 1909 were under corporate owner- 
ship, both steam and street railroads being almost invariably operated 
by corporations. All the establishments engaged in the manufacture 
of rubber boots and shoes and all but one of those engaged in the 
locomotive industry and in the smelting and refining of copper were 
operated by corporations. 

In 32 of the 86 leading industries in the United States, establish- 
ments under corporate ownership reported 90 per cent or more of 
the total value of products in 1909. These industries comprise, in 
addition to those named above, "agricultural implements," "auto- 
mobiles, including bodies and parts," "brass and bronze products/' 
"cars, steam-railroad, not including operations of railroad com- 
panies," "cement," "chemicals," "clocks and watches, including 
cases and materials," "coke," "cordage and twine and jute and linen 
goods," "cotton goods, including cotton small wares," "electrical 
machinery, apparatus, and supplies," "fertilizers," "fire-arms and 
ammunition," "gas, illuminating and heating," "glass," "iron and 
steel, blast furnaces," "iron and steel, steel works and rolling mills," 
"iron and steel, bolts, nuts, washers, and rivets, not made in steel 
works or rolling mills," "liquors, malt," "oil, cottonseed, and cake," 
"paper and wood pulp," "petroleum, refining," "pottery, terra- 
cotta, and fire-clay products," "rubber goods, not elsewhere specified," 



708 BUSINESS ADMINISTRATION 

"silverware and plated ware," "stoves and furnaces, including gas 
and oil stoves," and "wire." In all but one of these industries 
corporations controlled more than half of the total number of establish- 
ments. In most of them the average size of establishments is large. 
On the other hand, in only 12 of the 86 leading industries did 
establishments under corporate ownership contribute less than 50 
per cent of the total value of products in 1909. These were the 
industries "artificial flowers and feathers and plumes," "bread and 
other bakery products," "butter, cheese, and condensed milk," 
"clothing, men's, including shirts," "clothing, women's," "fur 
goods," "gloves and mittens, leather," "jewelry," "marble and stone 
work," "millinery and lace goods," "mineral and soda waters," and 
"turpentine and rosin." In only 3 of these — the fur goods, women's 
clothing, and turpentine and rosin industries — did the proportion fall 
below one-fourth. In all of these 12 industries the average size of 
establishments is small. 



See also p. 553. Technological Industry Is Frequently Large 
Scale Industry. 



3. THE INDIVIDUAL PROPRIETORSHIP 1 

The individual proprietorship has several marked advantages 
which make it a prominent type of business organization. In the 
first place, the individual proprietor can ordinarily undertake any 
kind of business enterprise except those which are assumed by the 
government exclusively, or are forbidden on grounds of public policy, 
or require special licenses. Thus an individual business enterpriser 
cannot, in the United States, undertake the transportation of the 
mail, or engage in coining money, or at the present time engage in 
the lottery business. But outside of those business activities which 
are assumed by the government, forbidden entirely, or permitted 
by license only, the individual proprietor is free to enter into any 
business enterprise, conduct it as long as he pleases, and retire from 
it whenever he has completed all the contracts which he has entered 
into. The ability of the individual proprietor to enter into business 
undertakings without any formality and retire in the same way is 
an important factor in promoting business enterprise and in keeping 
the several lines of business activity evenly developed. 

1 Adapted by permission from M. H. Robinson, Business Administration, 
pp. 29-32. (La Salle Extension University, 1911.). 



THE FORM OF THE BUSINESS UNIT 709 

In the second place, the individual proprietor, having no one else 
to consult, can act in all emergencies with greater promptness than 
the more complex forms of organization. He may thus take ad- 
vantage of business opportunities that are impossible in the case of 
partnerships or corporations. For the same reason he may also 
avoid certain dangers that ordinarily surround, and sometimes 
destroy, business enterprises. Of course the ability to act promptly 
is not an unmixed business blessing. It is often the case that hasty 
action is the direct cause of business failure. 

In the third place, the individual proprietor can keep his own 
affairs to himself and, while the element of secrecy is of less and less 
importance as business management becomes more of a science and 
less of an art, still the more competitors know of one's business 
plans and processes, the less the chances of ultimate success. 

In the fourth place, since every business enterprise has its own 
peculiar risks and those who undertake the organization and manage- 
ment reap the profits from their exclusive operation, it follows that 
the same parties ought to suffer the natural penalties that result 
from unsuccessful management. In the individual proprietorship 
this is ordinarily the case. Those who manage business enterprises 
well prosper; those who do not soon fail and take their proper places 
as superintendents and laborers. The law of survival of the fittest 
thus is applied with almost relentless certainty to business enter- 
prises operated under the control of the individual proprietor, and 
rapid progress in the science and art of business management is a 
necessary result. 

There are, however, several particulars in which the individual 
proprietor fails to provide successful business organization for particu- 
lar kinds of businesses. The more important of these disadvantages 
may be enumerated and placed in contrast with the strong points 
of this type of organization. In the first place, owing to the demand 
for large organizations in certain industrial groups, the capital at 
the command of any one individual is often insufficient for the 
construction and operation of a plant of the greatest economy; 
hence individuals combine their capital. In the second place, large 
enterprises often require business judgment, skill, and ability beyond 
the capacity of any one man to furnish; hence several men enter 
into a combination to conduct jointly a business enterprise in order 
that they may secure the benefits of their co-operative wisdom. In 
the third place, in accordance with the teachings of the modern 



710 BUSINESS ADMINISTRATION 

theory of risk, business men hesitate to put all their eggs in one 
basket and undertake the risks that follow from such a policy. More- 
over, the individual cannot avoid the risks by organizing and manag- 
ing many small enterprises, for any one of such enterprises is liable 
for the losses suffered by any other of the business enterprises, and 
this scattering of the capital within the control of any one individual 
prevents him from securing the economies of a large scale of production. 
For these reasons the individual proprietorship is adapted to 
the following classes of industrial enterprises only: those where the 
capital required for efficient production is small; those where the 
risks of conducting the enterprise are relatively slight; those where 
the operations are simple in character and well understood by the 
average business man. Consequently organizations in which the 
skill and capital of a number of individuals are united have largely 
superseded the individual proprietor in all the industries which 
require large-scale production to secure the greatest efficiency. 



See also p. 671. Elimination by Combination of Risks. 



4. AGENCY AS AN ORGANIZATION DEVICE 1 

One of the most significant, pervasive, and, perhaps, obvious 
facts in the study of modern society is the well-nigh universal utili- 
zation of agency as an organization device in the conduct of business. 
So universal is this fact that it can scarcely be more than an interesting 
speculation to inquire how far business activities are carried on by 
those acting in representative capacities. 

Agency is a basic principle underlying all forms of business asso- 
ciation. The nature and characteristics of partnership, joint-stock 
companies, and corporations can be understood only in terms of this 
fundamental hypothesis that one person can act for and in the place 
of another. Each of the organization devices, of course, is marked 
by features more or less peculiar to itself, but in the final analysis 
each is based upon the relation of principal and agent. 

The objects for which an agency may be formed are almost as 
unlimited as human activities. There are in fact relatively few 
things which cannot be done as well through an agent as in person. 
Unlawful undertakings, commission of crimes, the doings of acts 
contrary to public policy, cannot be legally delegated to an agent; 

1 By W. H. Spencer. 



THE FORM OF THE BUSINESS UNIT 711 

certain acts, very personal to one, such as voting, taking an oath, or 
entering into the marriage relation, cannot be performed through an 
agency; and as a general rule delegated authority cannot be re- 
delegated. 

The formation of an agency is on the whole a fairly simple and 
non-technical transaction. The relation arises out of a voluntary 
agreement of the parties and is not ordinarily imposed upon them 
without their consent. It may be expressly made or it may be left 
to implication. It may originate in a contract or it may result 
from a gratuitous promise of the agent. The constitution of another 
as an agent need not be evidenced by any writing in the absence of a 
statute requiring written evidence. Where an agency does arise out 
of a contract, the usual principles of the law of contracts, with refer- 
ence to the capacity of parties, mutual assent and consideration, apply. 
The main consideration in the creation of an agency, at least from the 
principal's point of view, is a careful delineation of the powers of 
the agent. 

The agency relation has for its main purpose the carrying of 
the principal to a third person through the medium of the agent. Its 
operation is, therefore, tripartite; its operation always affects three 
different parties and produces, therefore, three distinct groups of 
consequences: (1) consequences as between the principal and the 
agent; (2) consequences as between the principal and the third 
person; and (3) consequences as between the agent and the third 
person. 

1. As between the principal and the agent, on the one hand, there 
is a series of duties which the principal owes to his agent by reason 
of the relation. The principal is under an obligation to compensate 
the agent for his services except in those cases in which the agent 
has undertaken to serve the principal gratuitously. The principal 
must reimburse the agent for all money which the latter expends on 
behalf of the principal in the course of his employment. Finally, 
the principal is under a duty to indemnify the agent against losses 
which he may sustain while acting for his principal. 

On the other hand, there is a series of duties which the agent 
owes to the principal. The agent is under a duty to obey all instruc- 
tions which his principal may impart to him. He owes a duty to 
the principal to exercise a reasonable degree of care and prudence in 
the performance of his duties. It is said, however, that an agent 
who undertakes to serve a principal gratuitously is under a duty to 



712 BUSINESS ADMINISTRATION 

show only a slight degree of care in the exercise of his authority. The 
agent is under a duty to manifest a high degree of good faith in all 
of his dealings with his principal and on his behalf. The relation 
between the principal and agent is a fiduciary one and the agent is 
not permitted to take advantage of it for his own benefit. Finally, 
the agent is under a duty at periodic times to account to his principal 
for all money which has come into his possession for his principal. 

2. What now are the consequences of the operation of the agency 
relation as between the principal and a third person? In general 
it may be said that the principal is bound by every act and contract 
of the agent within the scope of the latter's authority. Stated nega- 
tively, the principal is not bound by acts and contracts which are 
outside the scope of the agent's authority. It is impossible in this 
connection to indicate in detail what is included in the phrase, " the 
scope of the agent's authority." Speaking broadly, however, the 
scope of the agent's authority, in the first place, includes all of those 
powers which the principal expressly confers upon the agent and sub- 
jectively intends that he shall exercise; it includes, in the second place, 
any power which the principal leads the third person reasonably to 
believe that he has conferred upon the agent. 

It quite frequently happens that an agent exceeds his authority 
and purports to do some act for his principal which he has no power 
to do. By hypothesis, the principal is not bound by the act. He 
may, however, wish to reap the advantage of the act notwithstanding 
the fact that it was done in excess of authority. This he may do by 
ratification. Ratification is simply an expression of intention on 
the part of the principal to be bound by an unauthorized act of his 
agent. Ratification, as a general rule, binds the principal to the 
third person and the third person to the principal. It is a cure for 
lack of authority. Subsequent ratification, as it is sometimes said, 
is equivalent to precedent authority. 

The principal is not only bound by acts and contracts of his agent 
within the scope of the latter's authority but he is also liable for all 
torts or wrongs committed by his agent within the course of his 
employment. The principal chooses the agent; the agent acts for 
the principal and under his direction; the principal gets the benefits 
of the agent's activities. Why then should he not bear the burdens 
incident to the relation? Why should he not be held liable for 
wrongs committed by the agent within the course of his employment ? 
Thus reasoned the courts and the principle stated is a well settled 
rule of the common court. 



THE FORM OF THE BUSINESS UNIT 713 

3. Now as to the consequences of the operation of the relation 
between the agent and the third person. The general rule is that 
the principal and the principal alone is bound by contracts which the 
agent makes within the scope of his authority. However, there is 
one very important exception to this general rule: If the agent, as is 
frequently the case, fails to disclose his principal, the third person 
may at his election hold the agent or the principal, when he is disclosed, 
on the contract. 

If the agent exceeds his authority in making a contract, the 
principal is of course not bound by it; nor is the agent bound by 
it because the contract does not purport to be with him. What pro- 
tection has a third person under such circumstances? If the agent 
knowingly and intentionally exceeds his authority, the third person 
may hold him in damages for fraud; if the agent innocently exceeds 
his authority, the third person in some cases may hold him liable in 
damages for a breach of an implied warranty of authority. Other- 
wise, the third person deals with an agent at his peril and must assume 
the risk of the agent's exceeding his authority. 

For obvious reasons the agent and the agent alone is responsible 
to the third person for torts and wrongs committed by him outside 
the scope of his employment. The principal and the agent are 
jointly and severally liable for torts and wrongs committed by the 
agent within the scope of his employment. That is to say, the third 
person may proceed at his election against them jointly or he may 
proceed against either or both of them separately. Needless to say, 
however, the third person is entitled to only one satisfaction in 
respect to the injury even though the law gives him three causes 
of action. 

The relation of principal and agent may be terminated in one of 
several ways. The relation is the result of an agreement of the 
parties to it and may always be changed or terminated by a subsequent 
agreement of the parties regardless of the content of their original 
understanding. An agency created for a definite time terminates 
upon the expiration of that time; an agency for a specific object 
comes to an end upon the accomplishment of the object. A gratuitous 
agency may be terminated by either the principal or the agent at will. 
An agency, even when it arises out of a contract, may be terminated 
by the act of either party: The principal may revoke the agent's 
authority or the agent may renounce his agency. In either event, 
however, the act terminating the relation is a wrongful act, a breach 
of contract, for which the injured party is entitled to recover damages. 



714 BUSINESS ADMINISTRATION 

The relation is generally cut short by the death or the insanity of 
either the principal or the agent. The relation is similarly affected 
by the bankruptcy of either principal or agent as to matters involved 
in the bankruptcy proceedings. 

5. ORDINARY PARTNERSHIPS, SPECIAL PARTNER- 
SHIPS, AND MINING PARTNERSHIPS 



Relations which will subject the parties to the liabilities of 
partners are easily formed. The mere representation that they are 
partners, or their passive acquiescence in such representations by 
others, will, as to third parties, suffice to establish partnership liabili- 
ties. To form a partnership as between the parties themselves is 
less simple, requiring the following essential elements: (1) a contract; 
(2) parties competent to contract; (3) partnership capital or prop- 
erty; (4) a community of control; (5) a lawful business; (6) profit- 
sharing as a motive. 

In addition 'to the essential elements or features already enumer- 
ated, or as a consequence of them, the partnership relation is charac- 
terized by certain distinctive features. 

1. Each partner is an agent for the others in the transaction of 
anything within the scope of the partnership purposes. Hence, any 
contract relating to the proper business of the firm entered into on 
its account by any one of the partners is binding on the firm. 

2. Each partner shares either equally, or in agreed proportion, in 
the net profits of the business and usually in the losses also. 

3. In case of insolvency each partner is personally liable for all 
of the firm's obligations. This is the most onerous feature of the 
partnership relation. 

4. The property, the business, firm name, good-will, and any 
trade-marks or other intangible possessions are firm property and 
form part of the common fund. 

5. The partnership relation is a purely personal one and is termi- 
nated by the assignment of an interest, or the death or retirement 
of a partner. A new member cannot be introduced into a firm 
unless by agreement of all the partners, and then the resulting 
association, though under the old name, is a new partnership. 

1 Adapted by permission from Thomas Conyngton, Partnership Relations, 
pp. 13-14, 16-18, 20, 21, 22. (The Ronald Press Company, 1905.) 



THE FORM OF THE BUSINESS UNIT 715 

6. A partner is entitled to good faith and fair dealing from his 
associates, and on dissolution may have an accounting to ascertain 
his interests in the business. 

7. Unlike a corporation, the partnership has no entity distinct 
from its membership. It cannot sue or be sued in the firm name. 
It cannot contract with or bring suit against its members, nor can 
they bring suit against it. 

A special partnership is formed for the transaction of some 
single piece of business, or for the conduct of some one line of business. 
It is sometimes termed a particular partnership. A partnership to 
buy and sell some definite piece of land, to ship a cargo to some 
particular place, to buy and operate a threshing machine, to deal 
in specified stocks, or to finance and sell a particular patent are all 
examples of special partnerships. A common form in the present 
day is the syndicate organized for the promotion or financing of 
some large corporate enterprise. 

The special partnership is distinguished from the general partner- 
ship solely by its more limited purpose. The authority of the part- 
ners in a special partnership is confined to its specific undertaking, 
and third persons dealing with it are expected to exercise more care 
in ascertaining the identity of the partners and the limits of their 
authority than when dealing with a general partnership. Beyond 
this, the distinction between general and special partnerships is of 
little importance, as the same rules govern both. 

Mining partnerships form a class to themselves. The United 
States Supreme Court said: "Mining partnerships, as distinct 
associations with different rights and liabilities attaching to their 
members from those attaching to members of ordinary trading 
partnerships, exist in all mining communities." Under a mining 
partnership the co-owners of a mine may work it together as partners 
in the profits only, the mine or mines being owned in common, but 
not held to be partnership property. This allows any owner to sell 
his share and introduce a new member without dissolving the partner- 
ship. Neither does the death or the insolvency of a partner affect 
the partnership. As any member may at any time transfer his share 
and bring in a new associate, there is no relation of trust and con- 
fidence between them, and the partners have no right to bind their 
fellows by contract. 

The actual mining under a partnership of this kind is usually 
conducted by a superintendent or managing partner appointed by 



716 BUSINESS ADMINISTRATION 

the mining partners or associates. But even though a managing 
partner be in charge, his power to bind the partnership by contract 
is very limited. He can only make valid contracts for such supplies 
and labor as are actually necessary to the transaction of the business, 
and he cannot give a note binding the partnership unless authority 
to do so has by usage or express grant been given him. 

An ordinary general partnership may be formed for working a 
mine, but as a rule mines are operated under mining partnerships. 

Associations that are not partnerships. — i. Associations not formed 
for profit are not partnerships. The numerous unincorporated clubs, 
churches, societies, associations, and fraternal organizations are not 
partnerships and do not involve mutual agency nor partnership 
liability. They are governed, moreover, by entirely different rules 
from those regulating partnerships. 

2. In some states, business organizations designated as partner- 
ship associations are authorized. These are neither partnerships nor 
corporations, though they partake of the characteristics of both. 

3. Statutory joint stock companies have many of the features 
of the partnership. They have, however, transferable stock, so 
that the death of a member or the sale of his interest does not affect 
the organization; also they are authorized to sue and be sued in a 
single collective name, or in the name of one or more of the officers, 
and if a board of managers exists, the individual members cannot 
contract for the company. These peculiarities differentiate such 
companies from partnerships. 

4. Corporations differ in most of their fundamental features from 
partnerships. A stockholder in a corporation has no authority to 
contract; is not in most states liable for anything more than the 
due payment for his shares; the relation is not personal, and neither 
his death, his insolvency, nor the assignment of his interest affects 
the corporation. Also the corporation itself has an entity apart 
from its stockholders, and sues and is sued in its corporate name. 
More than this, it can sue its members and they can bring suit against 
it, without interfering with their membership relations. 

5. The law does not imply a partnership from common ownership 
of either chattels or land. Co-ownership, or tenancy in common, 
does not therefore involve any partnership between the co-owners. 
One co-owner could readily sell his interest, his death would not 
interfere with the relation, nor would he have authority to bind the 
others by a contract relating to the common property. 



THE FORM OF THE BUSINESS UNIT 717 

Joint tenancy, in the few cases where it exists, is also entirely 
different from partnership, involving but few of the features of this 
latter relation. The right of survivorship which marks joint tenancy 
has no place in the law of partnership. 

6. Contracts are very frequently made for a share of profits as 
compensation for services, for the use of property, or for the loan 
of money. This does not necessarily form a partnership. In some 
cases of this kind, however, it is difficult to draw the line and deter- 
mine the status of the parties. 

B 1 

A partnership may terminate in one of three different ways: by 
force of some agreement of the partners; by a wrongful act of a 
member of the firm; and by operation of law. 

A true partnership is always the result of an agreement between 
the partners. It accordingly follows that a firm may at any time 
be dissolved by a subsequent agreement of the partners regardless 
of the time originally set for the continuance of the relation. A 
partnership created for a specific object terminates upon the accom- 
plishment of that object; and a firm created for a definite time 
ceases upon the expiration of the time agreed upon. A partnership 
at will, as its name implies, is terminable at the pleasure of any 
member. In all of the foregoing instances, the relation comes to 
an end by force of some agreement of the parties. 

It is usually said that a partnership for a fixed period or for 
the accomplishment of a specific object can be prematurely terminated 
by a breach of the partnership agreement on the part of a partner. 
Such a breach is, of course, a wrongful act for which the injured 
partner is entitled to recover damages from the wrong-doer. Some 
courts, however, deny this and hold that a partnership for a fixed 
period or for a specific object is not terminable merely by the wrong- 
ful act of one of the partners. 

In certain cases a partnership is terminated by operation of law 
without regard to the consent or will of the partners. The relation 
is cut short by the death of any one of the partners. It would be 
contrary to the theory of a partnership, that each partner has the 
right to choose his co-partners, to hold that the personal represen- 
tative of the deceased partner succeeds to his membership in the firm; 
and if the surviving partners continue the business, the relation is 

1 By W. H. Spencer. 



718 BUSINESS ADMINISTRATION 

a new partnership and not the old one. Bankruptcy proceedings 
deprive a person of further control over his property and affairs and 
vest the control in a trustee. Accordingly, the partnership relation 
is terminated by the bankruptcy of any member or of the firm. 

6. AN EXAMPLE OF ORDINARY PARTNERSHIP ARTICLES 

James E. Smith and John Doe, both of the city of Chicago, 
Illinois, hereby mutually agree to become partners under the firm 
name of "Smith & Doe" to conduct the trade and business of print- 
ing in the said city for the period of five years from date. 

The said Smith invests his stock of presses, paper, ink, and other 
material, estimated to be worth ten thousand dollars, and the said 
Doe invests ten thousand dollars in cash. 

Both partners shall give their entire time and shall share losses 
and gains equally. 

xA.ll amounts earned or received by either partner for work, 
materials, or anything pertaining to the business, shall be deposited 
in the First National Bank of Chicago in the name of both partners, 
and shall be checked out as needed for expenses and supplies, by the 
signatures of both partners, and an equal amount shall be drawn 
each Monday morning for each partner for personal expenses, but 
a balance of five hundred dollars will always be kept and held. 

When the firm shall be dissolved the balance on hand shall be 
divided equally and all debts shall be paid from the money in bank, 
after which the money shall be divided equally between the 
partners. 

Witness our hands and seals this 25 th day of October, 191 1. 

James E. Smith, [l. s.] 
Attest: John Doe. [l. s.] 

Charles Robinson 

7. LIMITED PARTNERSHIPS AND PARTNERSHIP 
ASSOCIATIONS 1 

[The reader should observe that statute law is called upon to 
make these associations possible. Third persons must have their 
"due notice" of limitation of liability.] 

1 Adapted by permission from Scott Rowley, The Modern Law of Partnership, 
II, 1370-76. (The Bobbs-Merrill Company, 1916.) 



THE FORM OF THE BUSINESS UNIT 719 

A limited partnership is a partnership in which the liability of 
some of its members to bear any losses the partnership may sustain 
is limited to a defined amount, while the liability of its other members 
is not so limited. It must at all times consist of at least one general 
partner to be answerable to the public under the law for all the 
obligations of the partnership and at least one partner whose liability 
is limited to the sum contributed by him to the firm at its organiza- 
tion or to some amount provided by the statute. It is therefore 
properly based only on the existence of a general partnership and its 
general partners have the same rights and incur the same liability 
that members of a general partnership incur, but their duties are 
even more burdensome since they are deprived of any assistance 
from the limited members. The liability of a limited partner is 
generally limited by the statute to the amount he has contributed 
to the partnership at its formation. However, in some states his 
liability is fixed by statute otherwise. It is a kind of a union of 
capital and labor, as expressed by the Supreme Court of Connecticut 
in construing the limited-partnership statute, in which the court 
said: "We find a clear general purpose and intent by the legislature 
to encourage trade by authorizing and permitting a capitalist to put 
his money into a partnership with general partners possessed of 
skill and business character only, without becoming a general partner 
or hazarding anything in the business except the capital originally 
subscribed." The limited or special members of such a partnership 
are generally prohibited by the statute from participating in the 
conduct of the firm's business and by violating such prohibition they 
become liable to third persons, as general partners, while in a general 
partnership each member has an equal voice in the conduct of the 
partnership business. 

Such partnerships in some respects partake of the nature of cor- 
porations; they can only exist where authorized by statute and 
the liability of some of their members is limited like the hability of 
stockholders in some kinds of corporations; their business is to be 
conducted by the general partners, while the business of a corpora- 
tion is to be conducted by its board of directors. But this distinc- 
tion must always be kept in mind: the directors of a corporation 
are selected by the stockholders and may be changed by such stock- 
holders, while the general partners in a limited partnership are not 
selected by the limited members nor can they be changed by them. 
A corporation is an artificial person and constitutes a legal entity, 



720 BUSINESS ADMINISTRATION 

and its stockholders may transfer their stock, while a limited partner- 
ship, aside from its members, does not become a legal entity and 
generally its members may not change except upon dissolution and 
reorganization under the statute. 

[There is no need of detailed discussion of the so-called partner- 
ship association. Its fundamental difference from the "limited 
partnership" is that in the "association" all the partners have 
limited liability. It is apparent that this is possible only by giving 
"public notice" to third parties and that accordingly a statute will 
be passed setting forth the conditions under which such "associations" 
may operate.] 

8. AN ENGLISH VIEW OF THEIR LIMITED 
PARTNERSHIP ACT 1 

Generally speaking, the principle of limited partnership may serve 
a useful purpose in any business where — 

i. Some only of the members of the firm wish to limit their 
liability. 

2. One or more partners are content to leave the management 
of the business of the firm in the hands of one or more general or 
managing partners, and 

3. There are good reasons against converting the business into, 
or forming a private company. 

Many cases occur in practice in business and professional circles 
in which the foregoing conditions will be found to exist. What is 
often needed in such cases is a form of association between the 
ordinary partnership and the limited company, and this form is to be 
found in the limited partnership created by the Act. 

Business and- professional men. — To deal first with business 
firms. It may be taken that, with the advance and expansion of 
commercial enterprise, three objects have emerged of supreme 
importance to the business community: unfettered facilities for the 
employment of capital, effective provisions for its security, and 
protection against unlimited liability. These objects have been 
achieved to a great extent by the passing of the Companies' Acts, 
but there are many instances where it is inadvisable to turn a business 
into a private company with limited liability. The publicity so 
involved may be a very real objection, or, again, the nature of the 

1 Adapted by permission from "Limited Partnerships," The Solicitors' Journal 
and Weekly Reporter, LVIII (1913-14), 574-75, 591- 



THE FORM OF THE BUSINESS UNIT 721 

business may be such that it cannot be conducted by a company, or 
that it depends upon the unlimited personal responsibility of those 
engaged in it. In many cases to limit the liability of a firm would 
be seriously to affect its credit. When an increase of capital is 
desired under such circumstances, it can be obtained in two ways, 
by loan, or by the introduction of a limited partner. But if a loan 
is chosen it must be very carefully arranged, otherwise the lender 
may find himself unexpectedly in the position of a full partner with 
unlimited liability. If, on the other hand, a limited partner is 
brought in, his liability will be limited to his contribution, while he 
will still have the advantage of sharing in the profits of the firm. 
The managing partners will obtain the necessary capital, without 
having surrendered any part of the control or management of the 
business. Moreover, the difficulty of publicity will be overcome, 
for the firm name will remain the same; the name of the limited 
partner need not form a part of the bill-heads or advertisements, 
nor need the word "Limited" be added. The articles of partner- 
ship wiT be as secret as before; private arrangements between the 
partners will not be disclosed; and, what is perhaps even more 
important, the amount of the capital subscribed by the general 
partners will not become public property. 

What has been said with regard to business men applies also to 
professional men, such as medical practitioners, solicitors, stock- 
brokers, and so on. 

Small traders. — The advantages offered by the Act to small 
traders are equally obvious, and the register shows that a very large 
proportion of limited partnerships have been registered by this 
class. Here again the Act is useful in affording to a trader a simple 
and inexpensive means of obtaining additional capital without 
converting his business into a company. 

In addition to those already referred to, there are many other 
circumstances in which the limited partnership principle has been 
adopted with advantage. The following instances may be quoted. 

Sleeping partners. — A sleeping partner is in a somewhat precarious 
position, since his liability is unlimited though he exercises no control 
over the business. The Act provides him with an easy way of limit- 
ing his liability. 

Retiring partners. — It frequently happens that a senior partner, 
who wishes to retire from active management, is quite willing to 
allow some, or all, of his capital to remain in the business. He 



722 BUSINESS ADMINISTRATION 

will thus be saved the inconvenience and anxiety of having to find 
an investment for his capital, and will be able to retire without 
crippling the business by withdrawing his money, and without 
rendering it necessary to find a new partner. 

Relatives of deceased partners. — The same considerations apply 
to these as to retiring partners. Instead of withdrawing the share 
of the deceased partner from the business, or leaving it in and con- 
verting the concern into, a limited company those entitled to the 
deceased partner's share can now become limited partners themselves. 
The articles of partnership should contain a clause making this 
possible. 

Amalgamation. — The following is another example of a useful 
purpose to which the Act may be and has been put. A, the owner 
of a business, is anxious to retire; he is approached by B and C, 
the owners of another business, with a view to a purchase. Instead 
of a sale, an amalgamation is arranged, and A becomes a limited 
partner in the amalgamated concern. His good-will, fixtures, stock- 
in-trade, book debts, and other assets are then credited in the books 
as his contribution to the capital. This is made possible by the 
provision of the Act that a limited partner may contribute "property 
valued at a stated amount." 

Co-partnership. — Perhaps the most important section of the Act 
and the one which, if generally utilized, may prove of the greatest 
benefit to the community at large is section 4. This section provides 
that a "body corporate" may be a limited partnes. 

q. DEFINITION AND GENERAL NATURE OF 
JOINT STOCK COMPANIES 1 

[The student should notice that in many jurisdictions these 
companies, also, are regulated by statute, although "the association 
is based upon the common law right of the members to contract with 
one another."] 

A joint stock company may be defined as an unincorporated and 
voluntary association formed for the purpose of profit, having a 
common name, possessing a common capital contributed by the 
persons composing it, which capital is divided or agreed to be divided 
into shares of which each member possesses one or more, and which 

1 Adapted by permission from Scott Rowley, The Modern Law of Partnership, 
II, 1417-20. (Bobbs-Merrill Company, 1916.) 



THE FORM OF THE BUSINESS UNIT 723 

represent the interests of the members, and are transferable by the 
owner without the express consent of the other members or the 
creditors of the association. "Joint stock companies may be cited 
as quasi corporations of a private character. They are associations 
having some of the features of an ordinary common-law copartnership, 
and some of the features of a private corpora tion. ,, Those definitions 
in which a joint stock company is denominated a partnership, con- 
template the individual liability to third persons imposed by the law 
upon the members of the association, rather than the nature of the 
company in respect to its formation, the management of its affairs, 
its duration and dissolution which are among its distinctive char- 
acteristics. 

From the preceding definitions we may deduce the following 
observations concerning the general nature of joint stock companies. 

(a) Such a company owes its existence to the contracts of its 
members as set forth in the articles of association by virtue of which 
it has a valid legal entity under the common law, with a right to 
extend its existence as the parties forming it may see fit to provide 
in such agreement. But as hereinafter shown they are largely 
regulated by statute in many jurisdictions. The real character of 
the association must in each case be determined by the laws and the 
articles of agreement under which it is formed, and courts reading 
such articles in the light of conditions existing at the time they were 
made will, as far as possible, give effect to the same among the 
members themselves when they themselves only are interested, 
and for the purpose of determining the fiduciary relations existing 
between the association and its members, the association itself 
through all the changes in its membership, may be regarded at least 
in equity, as an ideal separate entity involving and possessing equitable 
rights and relations. 

(b) Since the association is based solely upon the common-law 
right of the members to contract with each other, there seems to be 
no reason why they may not legally do all the things they usually 
undertake to do, nor why the courts may not apply to them the same 
principles which permit parties to agree upon such forms of associa- 
tion as they may choose and hold these terms to be binding upon all 
who agree to them expressly or impliedly, but upon no other persons. 
As between themselves, therefore, each member of an unincorporated 
association, after all the assets of the company are exhausted, is 
bound to pay his proportion of the debts of the concern; but as to 



724 BUSINESS ADMINISTRATION 

the creditors each member is liable for all such debts, no matter what 
the private arrangements among the members may be. They might 
stipulate with each other in the articles of association that they shall 
not be responsible other than out of joint funds, yet as to the rest 
of the world it is clear that each is liable to the whole amount of debts 
contracted, nor can this liability be shifted except by a transfer of 
shares in the exact mode prescribed by the articles of association. 

(c) The association has a common name, which is usually descrip- 
tive of the business for which it is formed and does not consist of the 
names of persons. In this name it may enter into contracts in the 
manner prescribed by the articles of association, and may generally 
sue and be sued under that name. 

(d) The capital of the company is divided into shares, and the 
number of shares held by each member determines his interest and 
the extent of his control of the management, and as between the 
members themselves fixes his proportion of liability for debts of the 
association. Ordinarily these shares represent a certain amount of 
money, or the value of property transferred to the company by the 
shareholders. 

(e) The shares are transferable at the will of the owner, or at 
his death become assets of the estate in the hands of his personal 
representative. That the shares are transferable is evidence of the 
intent that such death or transfer shall not result in the dissolution 
of the company and gives it the quality of perpetual succession. 
The transfer of shares must be made in conformity with the articles 
of association, for by these the shareholders have themselves provided 
the means by which their interests, rights, and liabilities in the 
company may be made to devolve upon others and to these they 
must be held. 

10. SOME RESULTS OF INCORPORATION 1 

A corporation, it appears, then, is an association of persons. 

But there are other associations of persons for business purposes 
— partnerships, syndicates, and other associations resting merely on 
contract. If any of these associations take the benefit of this joint- 
stock corporation law, they become corporations. What do they 
gain by it ? In other words — and the putting of this question as 
really the fundamental one, greatly clarifies the subject — what is 
incorporation ? What is it, and of what advantage is it, to become 

1 Adapted by permission from Thomas Thacher," Incorporation," in Yale Law 
Journal, IX (1899-1900), 85-88. 



THE FORM OF THE BUSINESS UNIT 725 

a body corporate or corporation ? Suppose that a number of persons 
have come together to form an association for business, and the 
question is raised whether or not they shall file their articles and 
become incorporated. Will they have any broader powers as to the 
business they may do? Certainly not. They can engage in any 
lawful business, unincorporated. Incorporated, they can do nothing 
more. If they desire to be able to change the business upon the 
agreement of less than all the associates, the articles can so provide. 
As to the business they may do, they rather assume a restraint than 
gain a greater freedom, by incorporation. And they subject them- 
selves to the burden of making reports about their business to state 
officials. They do not by incorporation acquire the right to use a 
larger capital in their business, and as to the issue of shares and the 
getting of additional capital in the future, the articles may provide 
as fully, and perhaps with less restrictions, if the association is 
to remain unincorporated. The statute contains convenient pro- 
visions as to organization and management, which are carried into 
the articles without being expressed, if the articles are filed. But 
like provisions may be expressed in the articles with but little more 
trouble, if the association is to rest on agreement merely. Speaking 
generally, the association, if not incorporated, may have as broad 
powers, as large a capital and as much freedom of action, as if it 
becomes a corporation. Indeed it is under less restraint and, if its 
associates are of one mind, it is practically unlimited, as an individual 
is, as to what it may do or what it may own. Its power for good 
or evil as an influence in the line of business in which it operates is 
quite as great. 

By becoming a body corporate, the association gets simply 
the right to be regarded, in its legal relations, as though it were 
a being separate from those who compose it. That is the meaning 
of the phrase as determined by the usages of the past. Call it an 
independent entity, if you please, or a legal person. The idea is 
graphically set forth by these names; and the names are of value in 
its application. Incorporation creates the right to be regarded as a 
separate being. The association is an association of persons after 
incorporation as before. The associates and their successors, that is, 
in a stock corporation, the stockholders, associated together, under 
the articles, are the corporation. But in the relations of the associa- 
tion with the individual stockholders and with all outsiders, it is, when 
incorporated, to be dealt with and regarded as an independent body. 



726 BUSINESS ADMINISTRATION 

And from this come two results: first, that the death of the 
associates or the transfer of their interests does not affect the 
existence of the corporation; and, second, that the individual stock- 
holders are not chargeable with the acts or omissions of the cor- 
poration, are not liable for its debts or obligations or for the wrongs 
which it commits, except so far as the statute may expressly provide. 
The first of these results is, in many cases, the sufficient inducement 
to incorporation, because of the convenience of having a business so 
organized that many can participate in its profits, that interests may 
be divided and sold or bequeathed without disturbing the business 
itself. All this may, it is believed, be accomplished by agreement. 
Witness the unincorporated joint-stock companies engaged in the 
express business. But the statutes have been carefully worked 
out; and if there is any omission it can be supplied by further legis- 
lation; and so it is much more convenient to reach these ends by 
incorporation than by agreement merely. Still, that the same 
continuity of the association, the same transferability of interests 
could be accomplished by agreement merely, is not to be forgotten 
when legislation is proposed, based upon what the corporation gets 
from the state. But what cannot be got by agreement is the irre- 
sponsibility of the associates or stockholders for the acts or omis- 
sions of the association. Theoretically, perhaps, this might be 
deemed possible, because all who should have dealings with the 
association might conceivably so agree. But practically, it is im- 
possible to secure this result save by the action of the state. This, 
then, is the chief thing which the state confers by incorporation, 
freedom from personal liability, or, in some cases, limitation of 
personal liability, for the debts and wrongs for which the association 
is responsible. This is common to corporations of all kinds, and is 
peculiar to corporations. And there is nothing else of which this 
can be said. 

A few applications of what has been said to the suggestion made 
at the outset seem appropriate. 

Since freedom from, or limitation of, the personal liability of 
the associates is the only thing common to all corporations and 
peculiar to them, and it comes by grant from the state, this is the 
chief basis of the right and the propriety of legislative regulation 
of the management of incorporated companies. Authorizing the 
associates to do business, to invite credits, without the ordinary 
liability of individuals, the state is bound to concern itself with the 
management of their capital, which is the sole reliance, or in excep- 



THE FORM OF THE BUSINESS UNIT 727 

tional cases, the chief reliance, of creditors. The propriety of statu- 
tory regulations looking to good management cannot be doubted, 
and good management means management intelligent, effective, 
and honest. 

Out of the common provision that the affairs of corporations 
shall be managed by a board of directors comes a legitimate basis 
for regulation of management in the interest of stockholders. Stock- 
holders, as a rule, have no voice in the management save to determine 
by their vote at fixed periods who the directors shall be, and to make 
by-laws. The power to make by-laws does not permit the general 
management to be taken out of the hands of the board, in which 
it is vested by law. Hence, in matters of regulation looking to good 
management — management intelligent, effective, and honest — it is 
proper that the Legislature should consider not only the interests 
of outsiders who are or may become creditors, but also the interests 
of stockholders. 

In the interest of creditors or those who may become such, 
provisions requiring reports to be made, revealing the financial 
condition of corporations, find legitimate basis; but intelligent 
legislation of this kind will require no further publicity than the 
purpose requires. The interests of stockholders require only private 
reports to them. And as to those who may think of purchasing 
stock, it is doubtful whether they may not best be left to the 
rule of caveat emptor, with the additional protection as to stocks 
dealt in on the exchanges of the regulations which such exchanges may 
adopt, and with, perhaps, more stringent enactments as to mis- 
leading statements in prospectuses and the like, whether issued by 
corporations or not. The stock of many corporations changes hands 
but rarely. They are private institutions, and except for the protec- 
tion of creditors, there would seem to be no reason why they should 
be required to make their affairs public. 

Statutory provisions operating upon all corporations are not 
justified by reasons relating to such franchises as the franchise of 
operating a railroad. Legislation based upon such reasons should 
be limited to the particular class of corporations holding such 
franchises. 

n. HISTORICAL STAGES IN THE CORPORATION 1 

Having regard to their creation, there have been three princi- 
pal eras of private corporations. During the first period they were 

1 Adapted by permission from W. F. McCook, "Suggestions on the Organiza- 
tion of Corporations," in Yale Law Journal, IV (1894-95), 169-72, 



728 BUSINESS ADMINISTRATION 

created by royal prerogative. These franchises were generally 
granted as royal favors. They were more or less related to the 
administration of public affairs or the increase of the material 
interests of the home government or its colonies. The purpose of 
their creation was largely to extend the political power or increase 
the revenues of the Crown. The essential characteristics of such 
corporations were only two, perpetuity and exclusive rights. The 
directors or managers constituted the corporation. Stockholders, 
as the term is now used, were then unknown. Their existence 
was not contemplated in the deed or grant of incorporation. Their 
rights, duties, and liabilities were not denned. They were share- 
holders only in the limited sense that they had the right to share 
the profits earned by the stockholders or managers. The foundation 
of this right lay in contract only. Their relation to the directors 
was that of trustees and cestui qui trust. As a general rule they 
could not even select their own directors, the right to fill vacancies 
in that body being vested in the remaining members of the board. 

The second period is that in which, both in this country and in 
England, corporations were created by legislative enactment. 
Each corporation was created by a separate enactment. The 
most general plan of creation was to constitute certain persons 
named as incorporators or commissioners, authorizing them to 
receive subscriptions for the capital to be applied to the under- 
taking named in the enactment. When a given amount of capital 
was thus subscribed they were directed to call the subscribers to- 
gether, and the latter perfected their organization by electing their 
officers and directors and defining their respective duties by by-laws 
adopted by them. Thus the stockholders have come prominently 
into view. Their power in the organization and management of 
the corporation is increased; that of the directors is diminished and 
defined. The stockholders select the directors, define their duties, 
and limit the duration and scope of their offices. 

The public was not as yet quite prepared for the idea that he, 
for whose benefit the common undertaking is carried on and who 
derives all the resulting profits therefrom, should enjoy absolute 
immunity from the common law liability of joint undertakers. 
Therefore a conservative compromise between general, individual 
liability on the one hand and entire immunity from the claims of 
creditors on the other, was hit upon, and it was generally provided 
that the individual liability of the stockholder for the debts of the 



THE FORM OF THE BUSINESS UNIT 729 

corporation should bear a limited, fixed relation to the amount of 
stock held by him. This liability has been denned to be second- 
ary, the creditor being first required to pursue the corporation to 
the extent of its assets. This idea is preserved in our national bank 
statutes, whereby the stockholder is made individually liable in an 
amount equal to the stock held by him. It is in most of the charters 
of our state banks, and in some states it applies to all private corpo- 
rations. The prominent characteristics of corporations of this era, 
as contrasted with the preceding one are perpetuity, power of the 
stockholders over the management of the company, and limited 
liability of the stockholders. 

As these corporations were created by an act of the legislative 
body, politics often dominated its action both in granting and with- 
holding franchises. Strong lobbies grew up at our capitals, whose 
business it was to procure valuable franchises and sell them to others. 
The more liberal the scope of the charter, the greater the immunity 
of the stockholder, the more valuable the franchise was to sell. 
So broad and unlimited became the scope of these franchises that they 
were properly called " omnibus" charters. One such might be 
instanced under which a steamship line was operated on the Atlantic 
seaboard; it was next used as the contractor to construct an inter- 
state railway in the Southwest; now it is used to supply a large city 
with gas. Naturally this nefarious traffic in public franchises worked 
its own destruction; took from our legislature the power to grant 
franchises, and produced the third era of corporate creation which 
may be called the "free corporation era." 

England has not entered into this era as completely as our states 
have. There the right still resides in Parliament to create certain 
corporations, such as railway companies. In all of the states of our 
Union and as to almost all kinds of corporations, the right to be- 
come a corporation is free to any of its citizens voluntarily associating 
themselves together for such purpose. 

The evident purpose sought to be secured by these free corpo- 
ration statutes was to encourage opposition in manufacture and 
commerce and to prevent monopoly. With few exceptions, there 
is no liability on the part of the stockholders beyond paying for 
the stock for which they have subscribed. This done, the com- 
pany can borrow money, increase its liabilities to any extent it can 
procure credit, run itself into hopeless bankruptcy, and the stock- 
holders enjoy absolute immunity from the claims of creditors. 



73© BUSINESS ADMINISTRATION 

Looking at the present condition of the markets for our corporate 
securities, we may see that the striking characteristics of the cor- 
porations of our third era are protection to the stockholder, risk to 
the creditor. The reason for this is not hard to find when we consider 
the manner in which many of our corporate enterprises have been 
organized. 

12. FORM OF CORPORATION CHARTER 

We, the undersigned, in order to form a corporation for the pur- 
poses hereinafter set forth, under and pursuant to the provisions of 
the Act of the Legislature of the State of New Jersey, entitled "An 
Act Concerning Corporations (Revision of 1896)," and the acts 
amendatory thereof and supplemental thereto, do hereby certify as 
follows: 

ARTICLE I 

The name of the corporation is: 

ARTICLE II 

The principal and registered office of the Company is in the 

Building , New Jersey, and the name of the 

agent therein and in charge thereof, and upon whom process against 
this corporation may be served, is 

ARTICLE III 

The objects for which and for each of which the corporation is 
formed are: 1 

It is the intention that the objects, purposes, and powers specified 
in the clauses contained in this third paragraph shall, except where 
otherwise expressed in said paragraph, be nowise limited or restricted 
by reference to or inference from the terms of any other clause of 
this or any other paragraph in this charter, but that the objects, 
purposes, and powers specified in each of the clauses of this para- 
graph shall be regarded as independent objects, purposes, and 
powers. 

ARTICLE IV 

The following provisions for the regulation of the business and 
the conduct of the affairs of the Company are hereby established: 

^his "object clause" varies with the nature of the business. Ordinarily it 
is comparatively simple, but it may be made very broad and comprehensive, as in 
the case of the U.S. Steel Corporation, given in the following selection. 



THE FORM OF THE BUSINESS UNIT 731 

The corporation may use and apply its surplus earnings or accu- 
mulated profits authorized by law to be reserved to the purchase or 
acquisition of property, and to the purchase or acquisition of its own 
capital stock from time to time, to such extent and in such manner 
and upon such terms as its Board of Directors shall determine; and 
neither the property nor the capital stock so purchased and acquired, 
nor any of its capital stock taken in payment or satisfaction of any 
debt due to the corporation, shall be regarded as profits for the pur- 
poses of declaration or payment of dividends, unless otherwise deter- 
mined by a majority of the Board of Directors or a majority of the 
stockholders. 

The corporation in its by-laws may prescribe the number neces- 
sary to constitute a quorum of the Board of Directors, which number 
may be less than a majority of the whole number. 

The Board of Directors shall have power, without the assent or 
vote of the stockholders, to make, alter, rescind, or amend the by-laws 
of the corporation, to fix the amount to be reserved as working capi- 
tal, to authorize and cause to be executed mortgages and liens upon 
the real and personal property of the corporation; and from time 
to time to sell, assign, transfer, or otherwise dispose of any or all 
of the property of the corporation, but no such sale of all the property 
shall be made except pursuant to the vote of at least two-thirds of 
the Board of Directors. 

The Board of Directors from time to time shall determine whether 
and to what extent, and at what times and places, and under what 
conditions and regulations, the accounts and books of the corpora- 
tion, or any of them, shall be open to the inspection of the stock- 
holders; and no stockholder shall have any right of inspecting any 
account or book or document of the corporation, except as conferred 
by statute or authorized by the Board of Directors, or by a resolu- 
tion of the stockholders. 

The Board of Directors shall have power to hold its meetings, to 
have one or more offices, and to keep the books of the corporation 
(except the stock and transfer books) outside of the State of New 
Jersey at such places as may be from time to time designated by 
them. 

article v 

The Company shall be authorized to issue capital stock to the 
amount of dollars. The number of shares of which the capital 



732 BUSINESS ADMINISTRATION 

stock shall consist is shares of the par value of dollars each. 
(If preferred stock is desired, insert provisions therefor at this point.) 

ARTICLE VI 

The names and post-office addresses of the incorporators, and the 

number of shares of stock for which severally and respectively we 

do hereby subscribe, the aggregate of our said subscriptions being 

dollars, which is the amount of capital stock with which 

the Company will begin business, are as follows: 

Names Post-Office Addresses No. of Shares 

ARTICLE VII 

The duration of the Company shall be perpetual. 

In Witness Whereof, we have hereunto set our hands and seals 
this day of 191 

[L.S.] 
[L.S.] 
[L.S.] 

13. A CHARTER OBJECT CLAUSE 1 

III. The objects for which the corporation are formed are: 

To manufacture iron, steel, manganese, coke, copper, lumber, and 
other material, and all or any articles consisting, or partly consist- 
ing, of iron, steel, copper, wood, or other materials, and all or any 
products thereof. 

To acquire, own, lease, occupy, use, or develop any lands contain- 
ing coal or iron, manganese, stone, or other ores, or oil, and any wood 
lands, or other lands for any purpose of the company. 

To mine or otherwise to extract or remove coal, ores, stone, and 
other minerals, and timber from any lands owned, acquired, leased, 
or occupied by the company, or from any other lands. 

To buy and sell, or otherwise to deal or to traffic in iron, steel, 
manganese, copper, stone, ores, coal, coke, wood, lumber, and other 
materials, and any of the products thereof, and any articles con- 
sisting or partly consisting thereof. 

To construct bridges, buildings, machinery, ships, boats, engines, 
cars, and other equipment, railroads, docks, slips, elevators, water- 
works, gas works, and electric works, viaducts, aqueducts, canals, 

1 From the charter of the United States Steel Corporation. 



THE FORM OF THE BUSINESS UNIT 733 

and other water-ways, and other means of transportation, and to 
sell the same or otherwise to dispose thereof, or to maintain and 
operate the same except that the company shall not maintain or 
operate any railroad or canal in the state of New Jersey. 

To apply for, obtain, register, purchase, lease, or otherwise to 
acquire, and to hold, use, own, operate, and introduce, and to sell, 
assign, or otherwise to dispose of, any trade-marks, trade-names, 
patents, inventions, improvements, and processes used in connection 
with or secured under letters patent of the United States, or else- 
where or otherwise, and to use, exercise, develop, grant licenses in 
respect of, or otherwise to turn to account any such trade-marks, 
patents, licenses, processes, and the like, or any such property or 
rights. 

To engage in any other manufacturing, mining, construction, or 
transportation business of any kind or character whatsoever, and 
to that end to acquire, hold, own, and dispose of any and all property, 
assets, stocks, bonds, and rights of any and every kind, but not to 
engage in any business hereunder which shall require the exercise 
of the right of eminent domain within the state of New Jersey. 

To acquire by purchase, subscription, or otherwise, and to hold or 
to dispose of stocks, bonds, or any other obligations of any corpora- 
tion formed for, or then or theretofore engaged in or pursuing any, 
one or more of the kinds of business, purposes, objects, or operations 
above indicated, or owning or holding any property of any kind herein 
mentioned, or of any corporation owning or holding the stocks or 
the obligations of any such corporation. 

To hold for investment, or otherwise to use, sell, or dispose of, 
any stock, bonds, or other obligations of any such other corporation; 
to aid in any manner any corporation whose stock, bonds, or other 
obligations are held or in any manner guaranteed by the company, 
and to do any other acts or things for the preservation, protection, 
improvement, or enhancement of the value of any such stock, bonds, 
or other obligations, or to do any acts or things designed for any 
such purpose; and while owner of any such stock, bonds, or other 
obligations, to exercise all the rights, powers, and privileges of owner- 
ship thereof, and to exercise any and all voting power thereon. 

The business or purpose of the company is from time to time to 
do any one or more of the acts and things herein set forth; and 
it may conduct its business in other states, and in territories, and 
in foreign countries, and may have one office, or more than one 



734 BUSINESS ADMINISTRATION 

office, and keep the books of the company outside of the state of 
New Jersey, except as otherwise may be provided by law; and may 
hold, purchase, mortgage, and convey real and personal property, 
either in or out of the state of New Jersey. 



See also p. 434. Corporate Securities Viewed as Instrumentali- 
ties, 
p. 440. A Classification of Stocks, 
p. 448. A Classification of Bonds, 
p. 450. Recitals in Bonds. 

p. 456. Policies Concerning the Kind and Amount of 
Securities. 



14. THE POWERS OF STOCKHOLDERS 1 

A. OF THE POWER OF THE INDIVIDUAL STOCKHOLDER, AND OF THE 
STOCKHOLDERS ACTING INDIVIDUALLY 

Of the individual. — It is a fundamental principle of the partner- 
ship that each member is in all matters within the apparent and 
legitimate scope of the partnership business the general agent of 
his co-partners, and the firm and all its members are liable for what- 
ever is done by him in transacting the business of the partnership 
in the ordinary way. The position of the stockholder of a corpora- 
tion is entirely different. He is neither the agent of the corporation 
nor of its members, nor are his acts or contracts as an individual 
binding on either, though made with reference to the affairs of the 
corporation and for its benefit. 

The reasons for this difference in the powers of the members of 
a corporation and that of a partnership are to be found in a com- 
parison of the natures of the two organizations. The partnership 
can in no sense be viewed as having an existence apart from that of 
its members. Its liabilities are their liabilities. They, in short, are 
the partnership. The corporation, on the other hand, while it, like 
the partnership, is made up of individuals, is an entity entirely distinct 
from the members that compose it. It is a legal person, endowed 
with powers that belong in no wise to its corporators, and which 
cannot be exercised by them. Its liabilities are not the liabilities 

1 Adapted by permission from W. L. Kitchel, "The Power of Stockholders to 
Bind a CorDoration," in Yale Law Journal, V (1895-96), 84-92. 



THE FORM OF THE BUSINESS UNIT 735 

of its members, except to the limited extent to which they have by 
their subscription assumed them. It follows then that a stockholder, 
acting not in a corporate capacity, should have no more power to 
control this separate and distinct individuality than should any other 
person. Nor does the fact that his interests are bound up in that 
entity give him this power, for by his contract of membership he has 
surrendered his control, except in so far as by his vote he participates 
in corporate matters. 

A second reason for the wider power of the partner as compared 
with that of the stockholders is derived, not theoretically, but from 
the practical working of the two associations. The partnership is 
made up of comparatively few persons, who have united in a common 
enterprise with a full knowledge of one another and with confidence 
and reliance each in the other. Not so in the case of the corporation, 
which from its origin contemplates a membership more or less nu- 
merous and composed of individuals whose very existence may be 
unknown to the others. It stands to reason, therefore, that in his 
contract of membership the stockholder has intended to confer upon 
his fellows no such powers as does the partner on entering into the 
partnership. 

Of stockholders acting individually. — The principle having thus 
been established that the individual stockholders cannot bind the 
corporation, it necessarily follows that any number of the stockholders 
acting individually can have no greater power in this respect. And 
when carried to its extreme it is a necessary consequence of this rule 
that stockholders owning a majority or even all the stock of the 
company cannot control the corporation, except when acting duly in 
their capacity as members of the corporation. This applies also with 
equal force to a single member who himself represents a majority or 
even all the stock. 

Illustrations. — In conformity with these rules it has been held 
that a stockholder has no authority to release a debt due the corpora- 
tion; that individual members cannot transfer the corporate property. 
Nor can they even, although holding a majority of all the stock, make 
a valid lease or sale of such property. Nor can they mortgage the 
same. Shareholders, when not acting as a corporation, cannot convey 
lands of the corporation, though all join in the deed. The owner of 
all the capital stock of a corporation does not become thereby the legal 
owner of its property, and cannot maintain replevin for it in his own 
name. 



736 BUSINESS ADMINISTRATION 

B. OF THE POWER OF A MAJORITY 

Its extent. — In considering the power of a majority it will be found 
that it is similar in both corporations and partnerships. In the 
charter on the one hand and in the partnership agreement on the other 
are laid down in greater or less detail the general purposes and ends 
of the organization. In becoming a member both the stockholder 
and partner impliedly agree that in all that is necessary or incidental 
to the attainment of these purposes the majority shall have supreme 
authority and may bind the association. The necessity of implying 
such an agreement is evident when it is considered that if there were 
no such understanding it would be possible for one dissenting member 
to prevent the transaction of any business whatsoever, however 
thoroughly it might be included within the purposes of the association. 

Its limit. — From the fact that this power of the majority rests 
wholly upon the original contract of the members, be it a charter or 
a partnership agreement, it follows that in both classes of organization 
it must be limited in its extent by the scope of that same contract. 
To adopt any other view would be to hold that the dissentient stock- 
holder would be compelled to resort to one of two courses of action, 
both equally unjust. On the one hand he could remain a member 
of the corporation and be bound by the act of the majority, thereby 
being made a party to an obligation which in entering into the cor- 
poration he had never contemplated assuming, which he had never 
agreed expressly or impliedly to assume, and which by his dissent 
he had even refused to assume. That such a case is extremely unjust 
is palpable, and the other alternative is equally oppressive. All that 
would remain for such a stockholder would be to withdraw from the 
corporation. In this way a majority could absolutely control the 
organization, and the existence of such a power, susceptible to so 
great abuses and so conducive to corruption, would open the way to 
the greatest injustice. Hence, we drive the general principle that a 
majority of the stockholders can bind the corporation in all matters within 
the scope of the corporate purposes and in such matters only. 

In applying this general rule it will be found that the classes of 
cases which come under its control are several, and it will be necessary 
briefly to examine these in order. 

By-laws. — In the first place, to facilitate the attainment of the 
corporate purposes it is essential that a system of by-laws should 
be adopted, regulating the government and business methods of the 



THE FORM OF THE BUSINESS UNIT 737 

company. In so far as they are reasonable and tend to effect these 
purposes, by-laws adopted by the majority are binding on the corpora- 
tion, and their right to make them rests on the implied agreement of 
the shareholders in forming the company. But any such rules, incon- 
sistent with the original agreement which is the fundamental rule 
of the company, or which are injurious to the interests of the concern, 
or are unreasonable or contrary to the general principles of the law, 
it is, in accordance with our rule, beyond the power of the majority 
to thrust upon the corporation. 

Appointment of agents. — As it is necessary that in its business 
transactions the corporation should be represented by agents, it is 
impliedly agreed in the charter contract that such agents should be 
appointed. Hence, their appointment being within the limits of the 
charter powers, it is also, in accordance with our rule, impliedly agreed 
that the majority may select and confer authority upon such agents as 
may be necessary, and their choice in this matter will bind the company. 

Ratification. — Not only may the majority bind the corporation 
by its own acts within the limits laid down in the general doctrine, 
but it may also exert the same power by way of a ratification of 
unauthorized acts of its agents. Hence it follows that an act of an 
agent outside of the scope of his authority may by vote of the majority 
be made binding upon the corporation. But it also follows that this 
power of ratification has the same limitations as the primary power 
of the majority and hence no act of an agent which is beyond the 
limits of the charter can be made effective. 

Alteration of charter. — To materially alter the terms of the charter 
is clearly an act which is beyond the purpose of the charter agreement, 
unless therein otherwise stipulated. Hence our rule would prevent 
the acceptance of such alteration by a majority. 

Transfer of all corporate property. — To sell out all the property 
and privileges of a corporation is an act which is consistent with the 
purposes of its charter, when it is made necessary by the condition 
of the concern, as where the business has become unprofitable, and 
hence, it is within the powers of the majority to bind the corporation 
by a sale under such circumstances. But a transfer effected by them 
while the affairs of the concern are prosperous, whether for a purpose 
beneficial to the stockholders or not, is invalid, and at the suit of a 
stockholder an injunction will be granted to prevent such transfer, and 
if it has already been completed it will be declared void and an account- 
ing will be decreed. 



738 BUSINESS ADMINISTRATION 

Restrictions on general rule. — Although, as is seen from the cases 
already reviewed, the doctrine as stated has been thoroughly estab- 
lished, still in the greater number of corporations the power of the 
majority will be found to be actually much more strictly confined, 
in most cases extending only to a general oversight of the affairs of 
the company and to the appointment of its agents, while all other 
matters are delegated to the agents thus appointed. This limitation, 
however, can be easily reconciled with the general rule, for it will be 
found that, wherever such a restriction exists, it is invariably provided 
for by the express terms of the charter itself, which, as we have seen, 
must be in all cases the ultimate criterion of the powers of the majority. 

C. POWER OF STOCKHOLDERS ACTING UNANIMOUSLY 

Having thus disposed of the power of the individual stockholder 
and of the majority, there remains the final division of our subject — 
the power of the stockholders acting unanimously. An act of all 
the members in their corporate capacity is an act of the corporation 
itself. Hence this division of our subject embraces simply the ques- 
tion as to the power of the corporation to bind itself. It is no longer 
a matter of the power of the stockholders, but involves the whole 
doctrine as to the so-called ultra vires acts. A discussion of this theory 
is entirely beyond the scope of this article. Suffice it to say that 
the rale applying to a majority does not extend to the action of the 
whole membership. While no mere majority, however large, may 
transcend the limits laid down by the charter, it is otherwise with the 
stockholders acting unanimously, for many of their contracts and 
actions will be sustained, even though entirely without the scope of 
the charter purposes. It is readily seen why such acts should be 
binding in so far as they are not nullified by the intervention of other 
principles of law. The charter was created and existed only by the 
unanimous agreement of the stockholders. Hence it may be altered 
or entirely repudiated by any subsequent unanimous agreement on 
their part, and as among themselves they will be bound by any 
action in pursuance of such an agreement, however alien it may be 
to the terms of the original charter. But it is just at this point that 
the general principles of the law and of public policy intervene and 
determine which of these acts shall be deemed valid and which of no 
effect. The rules governing this determination can be ascertained 
only from a study of the doctrine of ultra vires powers. 



THE FORM OF THE BUSINESS UNIT 739 

It is no doubt true that for a complete discussion of the subject 
originally undertaken an examination into the doctrine of ultra vires 
would be necessary. But so extensive is this doctrine, and the results 
dependent upon it, that it should more fitly be treated as a matter 
entirely independent of the subject in hand. 

15. LIABILITY OF CORPORATE DIRECTORS 



It should be noted that only those powers which are given by 
the corporate charter, whether expressly or by implication, can be 
exercised by the board of directors, or by the vote of the directors 
and shareholders combined. Anything done beyond such powers is 
ultra vires, and subjects the corporation to an action by the state to 
forfeit its charter. 

It is the purpose of the paper to point out some of the duties and 
to indicate some of the liabilities attaching to corporate management. 
It is important, first, to determine what the legal relationship is 
between a corporation and its directors. Are they trustees in the 
strict meaning of that word or in any sense in which the law defines 
that word ? Or are they merely agents appointed by and acting for 
the corporation in its business transactions ? ■> 

There is a great difference, both in the duties and the liabilities 
of trustees and agents. A trustee is said to be one to whom property 
has been conveyed to be held or managed for another. While he 
acts for another's benefit he has large discretion and is usually inde- 
pendent from control by the legal owner of the property. The power 
and the equitable estate are vested in him for the purpose of control- 
ling the subject-matter of the trust. This authority does not come 
from the beneficiary but is to be found in the trust instrument and 
in the law relating to it. 

On the other hand, an agent is one who by the authority and on 
behalf of some other person undertakes to do some act or transact 
some business for another. He is at all times under the control of 
such other person relating to the affair in which he is acting. He 
has no title or interest in the property involved and his agency is 
terminable at any time by his principal. He is directed and con- 
trolled by his principal and is not clothed with discretion in the 

1 Adapted by permission from W. P. Rogers, "Corporations," Chicago Legal 
News, XL VII (1914-15), 382-84. 



740 BUSINESS ADMINISTRATION 

matter, unless it is specially given by his principal. His duties and 
liabilities are, therefore, much more limited than are those of a 
trustee. 

A director of a corporation holds a position somewhat similar 
both to that of a trustee and an agent and yet in many ways different 
from either. He has neither legal nor equitable title to the property. 
This remains in the corporation. He manages it for the corporation, 
although in the conduct of its affairs he receives little or no authority 
or instruction from the corporation. These he finds in the laws 
relating to his position. 

It is true he may ask advice of the stockholders relating even to 
the ordinary affairs of the corporation but he is under no obligation 
to do so. Concerning these, his position gives him power to act. 
But in a few extraordinary matters such as disposing of all the 
corporation's property, increasing the capital stock, or amending 
the corporate charter, the law usually requires some action of the 
stockholders preliminary to final action by the board of directors. 

There are many cases in which the question whether directors 
are trustees or only agents has been discussed, and the better con- 
clusion seems to be that they are agents but invested with large 
discretionary powers, and that they hold a fiduciary relation to the 
corporation and its shareholders. Because his powers are so ample, 
the law imposes upon the director the duty of diligence toward his 
trust, which must always be exercised in the interest of the benefi- 
ciary and never in his own behalf. It also holds him responsible for 
losses resulting from negligence or mismanagement of the property, 
by rules much more stringent than are applied to an agent. 

In accepting the office, directors impliedly contract to give to 
the corporate management their best judgment and such diligence in 
the duties connected with it as may reasonably be required. They 
cannot be relieved from liability on account of their imprudent 
management by reason of their ignorance or lack of experience or 
their honest purposes. They undertake, by assuming the office, 
to give to the business whatever time and attention may be re- 
quired of them in properly managing the interests intrusted to 
them. 

If they act with reasonable care, skill, and diligence, but never- 
theless commit an error of judgment or make a mistake of some 
character from which financial loss results to the corporation, they 
will not be held personally liable. 



THE FORM OF THE BUSINESS UNIT 741 

Directors must not be negligent in conducting the corporation's 
business. They must act in good faith. It is sometimes said that 
they must act with as much care toward the corporation's business 
as an ordinary prudent man takes in the management of his own 
affairs. But this rule has been much criticized and is evidently 
too stringent. If one as director is required to give to corporate 
business the same diligence which a prudent man gives to his own 
affairs, practically all the director's time would be thus occupied 
and he could not be diligent with his own affairs. The weight of 
judicial opinion is that directors are liable only for losses traceable 
to their own wrongs or gross neglect of their duties. 

That directors are liable in an action at law to their principal, 
the corporation, for losses resulting to it from malfeasance, mis- 
feasance, or their failure or neglect to discharge the duties imposed 
by their office, and in equity, to the stockholders for these losses 
(the corporation declining to bring suit) is clear, upon the authorities. 
Though the corporation is the legal entity, yet the stockholders are 
interested in the operations of the corporation while in a state of 
activity and, upon its dissolution, in the distribution of its property, 
after all debts are paid, and so its officers or agents stand in a fidu- 
ciary relation to both. But it is otherwise as to creditors. The 
directors of a going corporation, whether able to pay its debts or 
not, owe no allegiance to them. It is true that the creditors may 
extend credit upon the faith that the company has assets to pay its 
debts, and that these assets are prudently managed; yet they are 
strangers to the directors; they maintain no fiduciary relation with 
them; there is a lack of privity between the two. 

Of course the Legislature may by statute change this common 
law rule, and there are many statutes which have modified it. These 
statutes are so different in the various states that they cannot here 
be enumerated. 

Directors are held responsible to the corporation or to its share- 
holders for losses sustained by reason of their ultra vires acts. 

Directors' services for their corporations are presumed to be 
voluntary and without expectation of pay. It is supposed that com- 
pensation to directors comes in profits from the business in the 
form of dividends on their stock. Directors, therefore, are not 
legally entitled to compensation for official services rendered by them 
unless the same has been provided for by the charter or the by-laws 
of the corporation. 



74 2 BUSINESS ADMINISTRATION 

Their position not infrequently presents tempting opportunities 
for directors to personally profit in transactions for their corporation. 
But the law will not permit a director thus to secure secret profits. 
Should he do so, the corporation upon discovering this fact may 
either rescind the. transaction or require him to account to it for 
any such profits. It is a breach of trust for a director to accept a 
gift from one who is contracting with the corporation. He may be 
required to turn over to the corporation all such gifts, bribes or 
secret profits. Should the corporation refuse to bring an action 
against the guilty director, it may be instituted by a shareholder. 

B 1 

What might be called the amateur aspect of a directorship has 
probably increased greatly during recent years. By this is meant 
the idea that such a position is an avocation, a luxury, a compliment 
paid to a successful business or professional man, something like the 
bestowal of an honorary degree. And amid the great variety of 
other considerations that prevail, many have little or nothing to do 
with the management of the company's affairs. For example, one 
is elected because a relative is a large stockholder and would be 
pleased. Another bears an honored or conspicuous name which would 
look well upon statements. A third has large interests and is rather 
expected to " bring business." It is tacitly understood that none of 
these men will be called upon to contribute much of his time. 

It must be observed, in the first place, that there has been no 
relaxation as far as the statute books are concerned in the theory that 
directors are to exercise an active, if not continuous, control over the 
policy of a company. Many of the theoretical safeguards, however, 
have become either dead letters or the merest farce. For example, 
the provision that directors must be stockholders has become so 
atrophied that the phrase " qualifying shares" is employed frankly 
as though it were wholly legitimate and did not signify in its very 
origin a defiance of the spirit of the provision. For qualifying shares, 
as is well known, are merely those which are entered on the books of 
the company in the names of the several directors who have no stock 
but are desired as members of the board. So, although the title 
remains in the company itself, they become stockholders as far as 
the records are concerned, and everyone is satisfied. 

Two very obvious lines exist along which reforms might proceed. 
One is to recognize the maxim that everybody's business is nobody's 

1 Taken by permission from Frederick Dwight, "Liability of Corporate Direc- 
tors," Yale Law Journal, XVII (1907-8), 33-42. 



THE FORM OF THE BUSINESS UNIT 743 

business, and that as long as boards consist of numerous members with 
vaguely defined responsibilities very few will feel any serious sense 
of personal liability and will be inclined to attend to their duties only 
so far as it is convenient for them to do so. This proposition is 
emphasized by the modern rise of executive committees in importance 
— representing a logical if unconscious trend toward a concentration 
of responsibility — or perhaps, more properly, a realization of the 
difficulty of assembling a numerous body of busy men in a practically 
volunteer capacity at intervals of such frequency as to render their 
meetings very serviceable. 

The executive committee is merely an inner circle of the board 
composed usually of those directors who are most accessible, most 
interested in the operations of the corporation, and most familiar 
with them. It bears the same relation to the full board that an ordi- 
nary agent does to his principal, and in general its acts are those of 
the board. In many companies, indeed, its existence has reduced 
the directors practically to the level of a ratifying body whose services 
might easily be discarded. 

But the other very simple, if not wholly effectual, remedy would 
be to define sharply and apply vigorously the penalties which lie 
ready for indolent directors. 

The lesson to be gathered from the cases seems to be that, although 
courts adjure directors to be good and to give some heed to the 
companies they have honored with their " assistance," at the preseni 
time they are not required to be familiar with the operations of the 
company (Wakeman v. Dalley), they need not attend meetings of 
the board if inconvenient to do so (Briggs v. Spaulding), they are 
not responsible for the misconduct of executive officers appointed by 
themselves {Wheeler v. Aiken Co. Bank) unless, indeed, the wrong- 
doing is so palpable that it is practically forced upon their attention 
{Gibbons v. Anderson), and if they persuade two or three of their 
number to do all the work, the latter alone will be held responsible 
for a neglect of such duties {Warren v. Pennoyer). Where else in 
human affairs may be found so admirable a combination of distinction 
without anxiety, of reward without toil? Would it not be well for 
the corporations and society at large if penalties that are admitted 
to be proper in the abstract were insisted upon until the prodigious 
number of pseudo-directors who are now in evidence were "squeezed 
out," and a really hard-working director, as distinguished from an 
officer, became less of an anomaly than he seems under present 
conditions ? 



744 BUSINESS ADMINISTRATION 

16. THE DISSOLUTION OF A CORPORATION 1 

Unless otherwise provided by statute, a private corporation may 
be dissolved only in five ways: 

(a) By the weight of authority, by expiration of its charter. 

(b) By an act of the Legislature repealing its charter, under the power 
of repeal reserved by the state in granting the charter. 

(c) By the loss of an essential integral part, which cannot be supplied ; 
as by death or withdrawal of all the members, where there are 
no means of supplying their places; but this does not apply to 
modern stock corporations. 

(d) By surrender of its charter with the consent of the state. 

(e) By forfeiture of its charter for misuser or nonuser of its powers. 
But 

(i) A forefeiture only takes effect upon the judgment of a com- 
petent court ascertaining and decreeing a forfeiture, unless 
the Legislature has clearly provided otherwise. 

(2) Where the acts or omissions of which the corporation has 
been guilty are, by statute, expressly made a cause of for- 
feiture, the court has no discretion to refuse a judgment of 
forfeiture. But in other cases the court has a discretion to 
determine from the circumstances whether judgment of 
ouster of the franchise to be a corporation shall be rendered, 
or whether the corporation shall be merely ousted from the 
exercise of the powers illegally assumed. 

(3) The Legislature, as the representative of the state, may waive 
the right to insist upon a cause of forfeiture, as by acts 
recognizing the right of a body to continue as a corporation. 
But, to constitute a waiver, the acts must be inconsistent 
with the intention to insist upon a forfeiture. 

(4) The forfeiture must be enforced by the state, by its authorized 
representatives. It cannot be enforced or insisted upon by 
private individuals, either collaterally or directly. 

(5) A forfeiture may be enforced by scire facias where there is a 
legal existing body, capable of acting, but who have abused 
their power; or by an information in the nature of quo 
warranto where the body is merely a corporation de facto, 
or where it is neither a corporation de facto nor de jure. The 
procedure is now generally fixed by statute. 

1 Taken by permission from W. L. Clark, Jr., Handbook of the Law of Private 
Corporations, pp. 291-92. (West Publishing Company, 1916.) 



THE FORM OF THE BUSINESS UNIT 74$ 

17. SOME METHODS OF CONCENTRATION OF CONTROL 1 

[No attempt is made to give a full treatment of the various 
methods of concentration of control. The following selection gives 
an excellent summary of the field.] 

Thus far we have examined organizations which may be called 
simple associations. In each of the forms discussed in the fore- 
going pages, the individual has been the constituent unit, and, 
in each case, the individuals as units have been simply and directly 
associated. Formally, at least, the natural persons who are the 
members have stood in an immediate relation to the direction of 
the management of the organization. The highest and most efficient 
form of organization by simple association is the corporation. 

Looking around us today, what do we see? On all sides we 
behold complex organizations which indirectly, through subordinate 
and simpler forms, deal with markets which are sometimes world- 
wide in extent. Of course, independent simple associations, such as 
partnerships and uncombined corporations, continue to exist, just as 
the single-individual organization does; and, moreover, combinations 
were not unknown in earlier times; but a substantially accurate idea 
of the evolution of business organization will be gained if one thinks 
of a new cycle of development as opening about the time of the Civil 
War, or say 1870, and reaching a climax about 1898 — a cycle in which 
the constituent units more and more frequently became associations 
of individuals, and the resultant organizations were compound affairs 
or combinations. It may be said that artificial persons (corporations) 
more and more form the units of the later associations. For over a 
generation we have been growing more and more familiar with the 
rich terminology of combination. The columns of the press bristle 
with "combines," "trusts," "associations," "pools," "consolida- 
tions," "rings," "mergers," and what not. 

Few readers, or writers either, for that matter, discriminate 
carefully among the terms which indicate the various forms of com- 
bination; but there are as many different kinds of combinations as 
there are kinds of simple association, and in dealing with these 
different kinds it will be found conducive to clear thought to apply 
the various terms according to their logical denotation and best usage. 

To combine is simply to become one of the parts of a whole, and 
a combination is merely a union of persons to make a whole or group 

1 Adapted by permission from L. H. Haney, Business Organization and Com- 
bination, pp. 128-32. (The Macmillan Company, 1914.) 



746 BUSINESS ADMINISTRATION 

for the prosecution of some common purpose. The idea of purpose 
is not separable from the meaning of the word as used to indicate 
unions or men, for men hardly unite without a common object in 
view; and it is significant that even the dictionaries use the word 
"confederacy" in defining human combinations. Aside from the 
idea of purpose, however, the word "combination" is properly used 
as the most general and colorless term to denote any sort of union of 
persons, and will generally be so used in the following pages. The 
law, with which we are constantly touching hands in this subject, 
recognizes two classes of persons, the natural and the artificial, or 
corporate; and generally, in present-day business, persons of the 
latter kind are the ones which are directly concerned in the formation 
of combinations. Indeed it would be well if the word "association" 
could be used to indicate direct unions of individuals or natural 
persons, for that word implies a personal relation, a linking together 
in fellowship, which is not found in the combination of artificial 
persons. This is, perhaps, a refinement which cannot now be insisted 
upon, but it has been observed in these pages. When the term 
combination is used alone it will mean a compound combination, or 
combination of associations. 

Next, the idea of "federation" should be brought in. Federation 
is alliance for mutual support, or a union by agreement of independent 
and autonomous powers for mutual benefit in relations external to 
any one member, and it implies that outside of such external relations 
the members retain their independence and autonomy. Thus a 
federation, both in political and business life, is a relatively loose 
form of combination based upon mutual consent. 

Another general term is "consolidation." Consolidation, by the 
logic of words and by best usage, applies only to firm, compact 
alliances. It should, therefore, never be applied to federated organiza- 
tions, but only to combinations in which the members are so compactly 
united as to lose a large measure of independent and autonomous 
existence. They are fused. For example, both the Southern Whole- 
sale Grocers' Association and the United States Steel Corporation 
are combinations, but the former is a federation organization while 
the latter is a consolidation. The law recognizes the distinction 
between consolidation and mere combination, for the validity of 
consolidations, involving as they do a greater loss of individuality on 
the part of their members, depends upon statutory authority and not 
upon public policy; whereas combinations other than consolidations 



THE FORM OF THE BUSINESS UNIT 747 

have their validity determined by public policy,, and the laws rarely 
authorize but often forbid them. 

A "merger," as the term clearly indicates, is a form of organiza- 
tion in which the identity of the parts is lost. The members are 
absorbed, as it were, into a common whole, and the merger is thus 
a complete and absolute consolidation. Though the term is loosely 
used, there is considerable legal authority for confining "merger" to 
consolidations in which one business organization absorbs another 
or others and continues to exist, as when a railway system absorbs 
a branch line. In view of this fact, it is logical to use another term, 
"amalgamation," to indicate a consolidation in which all the com- 
bining organizations give up their identities, become fused, and 
coalesce in a new organization. 

An outline classification of combinations, then, would run some- 
what as the following: — ■ 

I. Simple Combinations: 

1. Association (direct combination of natural persons as in partnerships). 
II. Compound Combinations: 

1. Association (the loosest agreements directly between individual 

members of different associations: trade "associations," some 
simple "agreements," etc.). 

2. Federation (combination of organizations which remain separate and 

retain considerable autonomy: most simple "agreements" and 
pools). 

3. Consolidation (combination of organizations in which, while members 

may retain nominally separate, direction of business is fused). 

a. Partial Consolidation: 

(1) Securities holding (direction of business organizations con- 
solidated through stock ownership, with separate existence 
formally maintained). 

b. Complete consolidation: 

(1) Merger (complete consolidation, members of one business 

organization absorbed by another). 

(2) Amalgamation (complete consolidation, members of two or 

more organizations coalesce to form a new organization). 



See also p. 671. Elimination by Combination of Risks. 

p. 553. Technological Industry Is Frequently Large 
Scale Industry. 



748 BUSINESS ADMINISTRATION 

18. SIMPLE BUSINESS TRUSTS 1 

When the word "trust" is mentioned, most men at once think 
of some illegal combination. The term is in bad odor. Yet if one 
were to inquire of a lawyer concerning trusts one would probably 
be told that they are very desirable social institutions, and that 
they are perfectly legal. Moreover, in the conservative state of 
Massachusetts, one could find scores of harmless business organiza- 
tions which are carried on under the trust form. Whence comes 
this seeming paradox ? 

The trusts thought of by the layman are the " standard oil 
trust," the "sugar trust," and the like. These are all more or less 
monopolistic combinations of corporations. The lawyer, however, 
has in mind the general idea of the trust institution, which is a very 
different matter. While trusts may be readily perverted when used 
for combinations, they are necessary and beneficial in many other 
relations. The lawyer may be thinking of the trustees appointed by 
the courts to administer the estates of deceased persons, infants, 
etc. Also, in some states, trustees are chosen to carry on businesses 
for groups of individuals, and to supervise investments. Such uses 
of the trust institution need involve no monopoly; and they need 
combine no corporations. 

The simple business trust is a form of business organization under 
which the legal title to property is vested in an individual trustee or 
individual trustees. (Corporations may act as trustees, as is the 
case with trust companies. In such cases, the trust is the function; 
the organization is a corporation.) The property is managed by 
them in the interest of the former title holders who become "bene- 
ficiaries" (cestuis que trustent). The trustees thus become, not 
agents — as are partners — but principals; and they can make con- 
tracts, and can sue and be sued in their own names. The benefi- 
ciaries, in turn, are neither partners nor agents. They cannot 
convey the property to others; nor can they usually maintain any 
action at law for its protection. They only have the right of action 
against the trustees. With such a relation existing between trustees 
and beneficiaries, it is apparent that without any special provision 
to the contrary the debts of the business lie against the trustees, not 
against the beneficiaries. 

Under the common law, trustees may and do issue certificates 
of beneficial interest, the capital embraced in the trust being divided 

-* Adapted by permission from L. H. Haney, Business Organization and Combi- 
nation, pp. 117-27. (The Macmillan Company, 1914.) 



THE FORM OF THE BUSINESS UNIT 749 

into shares. These certificates are much like the stock certificates 
of a business corporation. 

Lawyers distinguish several classes of trusts: active and passive, 
simple and special, express and resultant, etc. The terms active 
and passive are self-explanatory. A " simple " trust is one established 
without any special instructions to the trustees, thus allowing great 
discretion on their part. An ''express" trust is created by an instru- 
ment which designates directly and expressly the property, persons, 
and purposes of the trust; whereas a resultant trust is one which 
results from the construction put by the law upon some existing or 
past relation. Practically all business trusts may be classed as 
active express trusts; but, as it is next to impossible to define the 
duties and policies of trustees, they are all virtually "simple" trusts. 
'From the economic point of view, two classes of trusts are clearly 
distinguishable: (i) trusts of real estate, and (2) trusts of personal 
property. Personal property trusts, in turn, are of two kinds: 
(a) industrial trusts for carrying on some manufacturing, mercantile, 
or other business; and (b) securities-holding trusts, organized for 
investment in or control of corporations or joint-stock associations. 

There is a kind of holding trust in existence to-day which, 
within certain limits, is entirely legal, however undesirable it may 
be. Such trusts are known as "voting trusts," and are sometimes 
called "stock pools." The voting trust is a kind of special express 
trust, which may be defined as a form of organization in which 
holdings of stock are combined by placing them in the hands of 
trustees to be voted in a stipulated manner. A voting-trust agree- 
ment is entered into; and the stocks are transferred to the trustees 
and taken out in their names, negotiable trustee receipts being given 
by them in exchange. They are authorized to collect dividends, 
and are bound to pay such dividends over to the holders of the 
trust receipts. Unified voting is the object in voting trusts, and the 
ownership of stocks is not vested in the trustees: they are trusts of 
management, not of property. 

If this form is at hand for organizing business units, and has 
actually been used in not a few cases, one's next inquiry is: What 
are its potentialities? Why is it used at all? Why is it not more 
used? The answer to these questions involves a discussion of the 
advantages and disadvantages of the simple business trust. 

Applying the six tests of efficiency of business organization, we 
note first that the trust is readily and cheaply formed. It does not 



750 BUSINESS ADMINISTRATION 

require the sanction of the state. In facility of formation, then, 
it is on a par with the partnership. 

As to capital, the trust lies between the partnership, as ordi- 
narily organized, and the corporation. The trustees issue certifi- 
cates which accommodate a number of investors; but the character 
of the management makes it impossible to appeal to so wide a market 
as do the stocks of a corporation. Furthermore, the trust certifi- 
cates can be sold or assigned only in states which authorize by statute 
the assignment of those rights to personal property which are contin- 
gent upon suit at law (choses in action). In other states the buyer 
may have to file a bill of equity to get the title. 

The liability of the members of trusts is in practice handled 
very satisfactorily, from the point of view of the investor. It is 
common to make an agreement that neither the trustees nor the 
beneficiaries shall be liable for the debts of the trust, which provision 
is made a part of every contract entered into by the trustees. In a 
word, it is provided that the trust property alone shall be looked to 
for the satisfaction of debts. This leaves the beneficiaries in a more 
desirable state than even the stockholders of a corporation, as there 
would be no excess of par value of shares over value of property to 
be drawn upon. Unless some such agreement is made, it appears 
that the trustees are personally liable : trustees can be held personally 
for material ordered for a trust estate, and for contracts made. 

The foregoing tests, then, are met fairly well. Aside from 
questions of legality, the crucial test, therefore, comes in the efficiency 
of direction. Here we find that the continuity of management is 
excellent; for trustees are not likely to be changed. In this the 
trust has an advantage over the corporation for businesses in which 
continuity is highly desirable. It also appears that in practice 
trustees can handle business with more ease and dispatch than the 
average board of directors. But the case is not so favorable on the 
important points of motivation and flexibility. True, the trustee is 
in equity bound to take such care of the trust estate as he would of 
his own property. That fact, however, can have but an uncertain 
and intermittent motive force, and can not adequately take the 
place of responsibility to shareholders. The beneficiaries have no 
power to remove trustee managers. They possess no remedy for 
unskilfulness on the part of trustees; and they can remove trustees 
who are guilty of fraudulent acts only by means of an uncertain bill 
in equity. As to flexibility, the trust is sadly deficient. The deed 



THE FORM OF THE BUSINESS UNIT 751 

of trust once drawn up and put in force, its provisions are not subject 
to change except by the unanimous consent of all parties. The courts 
cannot change the powers of trustees, nor alter the terms of the 
trust agreement. And a trustee who has accepted a trust can neither 
renounce the duties and responsibilities of his office, nor delegate 
them to another. We must conclude that the trust will supply a 
safe and efficient instrument for direction only in case of businesses 
which are little subject to change, and which require relatively 
little discretionary action on the part of the managers. Such a 
business is the holding and managing of real estate. 

A final disadvantage of trusts lies in their doubtful legal status. 
As a general proposition, at common law, trusts are quite legal: 
anyone who can enter into a contract, or make a will, or deal with 
legal title to property, may vest property in trustees. But, of 
course, this proposition is subject to the limitation set by public 
policy and by statute law. Trusts for combining corporations may 
be illegal as being the result of ultra vires acts by the corporations. 
New York and other states forbid trusts of real estate except in 
certain cases; and some states have abolished all trusts and uses 
except those which are established by will or deed. 

Considered from a social standpoint, the business trust is so 
liable to abuse, and requires such safeguarding, that it may fairly 
be called a dangerous institution. It will be remembered that the 
idea of the trust developed from the need of a suitable agency to 
manage the estate of incompetent persons, not to conduct businesses 
for competent persons. While the trust supplies a stable and en- 
during organization, as used in business, it almost of necessity places 
in the directors (trustees) a discretion which is out of all proportion 
to their actual responsibility. It is not a safe form, viewed from the 
standpoint of society. 

19. CO-OPERATIVE INDUSTRY 1 

[The sample of co-operative industry here discussed is taken from 
agriculture. Of course the principles here treated are of wider 
application.] 

There is much confusion in the use of the term "co-operation" 
as applied to agricultural efforts. It is commonly applied to any 
group of farmers who associate themselves together. They may 

1 Adapted by permission from G. H. Powell, Fundamental Principles of Co- 
operation in Agriculture, pp. 1-5, 9-10. (Circular No. 123, California Agricul- 
tural Experiment Station, 1914.) 



752 BUSINESS ADMINISTRATION 

organize as members of a voluntary unincorporated association of 
individuals; or as an incorporate capital stock association to handle 
farm crops for profit or for other purposes, or as non-profit corporations 
without capital stock. It is believed that its use as applied to business 
organizations in agriculture should be restricted to incorporated 
associations, societies, exchanges, or agencies which are formed exclu- 
sively for the benefit of the members; whose voting power is based on 
equality of membership; whose membership is confined exclusively 
to active producers, the membership ceasing to exist when the pro- 
ducer withdraws from the organization, and whose earnings are dis- 
tributed on the basis of the product, rather than on the capital con- 
tributed by each member, after a fair rate of interest is paid for the 
use of capital actually employed in the business, if any, and other 
overhead charges are deducted. A co-operative organization, there- 
fore, is not a corporation in which the capital is contributed primarily 
in order that it may earn a profit; nor one composed of producers and 
non-producers; nor one in which the producer's product is handled 
by a corporation for the benefit of the stockholders rather than for 
that of the members; nor one in which the membership is not under 
the control of the organization; nor one in which the members do 
not actually control the organization. It is an association of farmers 
who unite in an effort to handle their common interests through an 
agency which is controlled by them, on the principle of an industrial 
democracy, and exclusively for their benefit. 

The stock corporation as defined by the statutes of most states is 
not the form under which to incorporate a farmers' business organiza- 
tion, though most of the so-called co-operative associations have been 
incorporated under the stock corporation statutes. The stock corpora- 
tion laws have been enacted primarily to meet the needs of capital, 
not primarily for the benefit of those who may use the facilities of the 
corporation. The membership in such organizations is not under legal 
control, because the right to sell the stock is a legal incident of its 
ownership. A stockholder may sell his farm and continue to be a 
stockholder in a stock corporation and still have the right to examine 
the affairs of the association, or he may sell his stock to someone who 
is not interested in the organization, or who may even be antagonistic 
to it; or he may withdraw his membership and still remain a stock- 
holder. There is no legal way by which the stock, and therefore the 
control of the corporation, can be confined to the membership after 
the stock has once been issued, unless the association is able to take over 



THE FORM OF THE BUSINESS UNIT 753 

the stock and hold it as a trustee, until it can be resold to a member. 
Neither is the voting power of the stockholders under control in a 
stock corporation, because the voting power is generally proportional 
to the number of shares held by each stockholder. 

As a matter of fact most of the so-called co-operative associations 
of the country have been incorporated as capital stock corporations 
in the absence of other statutes under which they could be incorporated 
and many of them operate by mutual agreement expressed in the 
articles of incorporation, or in the by-laws, on strictly co-operative 
principles: others vote in accordance with stock ownership, fix the 
maximum amount of stock to be owned by any member, and appor- 
tion the stock on the bearing acreage of the members, but make no 
profits on capital. These organizations usually provide that a with- 
drawing member shall offer his stock to the association before he can 
sell it outside, a provision that is useless if the association is not able to 
take it over. 

They may provide also that all the earnings shall be returned to 
the members prorated on the business transacted by each after interest 
is paid on the capital invested and other overhead charges are deduced. 
The stockholders may vote equally by agreement and the capital 
invested may be paid only a fair rate of interest for its use. The 
difficulty in such organizations lies in the fact that some of the condi- 
tions to which they agree are not, in case of trouble, enforceable in the 
courts, and the organization ceases to be co-operative when the 
stockholders desire for any reason to exercise their legal privileges 
along non co-operative lines. 

As a result of organizing a so-called co-operative association 
under the stock corporation laws, many of these organizations often 
pass into the hands of non-producers or of rival interests, following the 
withdrawal of members through the sale of farms and the sale and 
transfer of stock; or a partial control may be held by dissatisfied 
stockholders who have withdrawn as members. 

In other states, especially in California, the statute provides for 
the incorporation, organization, management, and co-operation of 
agricultural, non-profit associations which do not have capital stock 
and whose business is not carried on for profit. These associations 
issue certificates of membership to each member but the membership 
cannot be transferred or assigned to any other person, nor is the pur- 
chaser of a property of a member entitled to membership by virtue of 
such purchase. In such associations the basis of voting and the 



754 BUSINESS ADMINISTRATION 

control of the membership is subject to rules made by the association. 
These associations may accumulate a capital with which to transact 
business though the capital is not in the form of a paid-in capital 
stock. It may be accumulated pro rata from the proceeds of the 
shipments of the members, or in any other way agreed to by the 
members. 

In Nebraska co-operation has been defined and given a legal status. 
The law says, "for the purpose of this act, the words ' co-operative 
company, corporation, or association ' are defined to mean a company, 
corporation or association which authorizes the distribution of its earn- 
ings in part or wholly, on the basis of, or in proportion to, the amount 
of property bought from or sold to members, or of labor performed, 
or other service rendered to the corporation." It differs from the 
general incorporation law of Nebraska by providing that every co- 
operative corporation has the power "to regulate and limit the right 
of stockholders to transfer their stock; and to make by-laws for the 
management of its affairs; and to provide for the distribution of its 
earnings." 

In Wisconsin, a law was passed in 191 1, which provides for the 
formation of "a co-operative association society, company, or 
exchange, for the purpose of conducting agricultural, dairy, mercan- 
tile, mining, manufacturing, or mechanical business." The law pro- 
vides that "no stockholder in any such association shall own shares 
of a greater par value than one thousand dollars .... or be entitled 
to more than one vote." It provides that the directors shall apportion 
the earnings, subject to revision by the association at any time, "by 
first paying dividends on the paid-up capital stock not exceeding 6 per 
cent per annum, then setting aside not less than 10 per cent of the net 
profits for a reserve fund until an amount has been accumulated in 
said reserve fund equal to 30 per cent of the paid-up capital stock, and 
5 per cent thereafter for an educational fund to be used in teaching 
co-operation, and the remainder of said net profits by uniform dividend 
upon the amount of purchase of shareholders and upon the wages 
and salaries of employees, and one-half of such uniform dividend to 
non-shareholders on the amount of their purchases, which may be 
credited to the account of such non-shareholders on account of capital 
stock of the association; but in productive associations such as 
creameries, canneries, elevators, factories, and the like, dividends 
shall be on raw material delivered instead of on goods purchased. 
In case the association is both a selling and a producing concern, the 



THE FORM OF THE BUSINESS UNIT 755 

dividends may be on both raw material delivered and on goods pur- 
chased by the patrons." The law provides that no corporation or 
association doing business for profit shall be entitled to the use of the 
term " co-operative " as part of its corporate or business name unless 
it has complied with the provisions of the act. 

In a strictly co-operative organization a fundamental principle 
should be "one man, one v~>te." It should be a real industrial democ- 
racy in which the members trust each other and lean upon each other's 
judgment as men. In such an organization neither the capital con- 
tributed, nor the volume of business transacted should be the basis 
of the responsibility or influence of the individual member, because 
neither can co-operate or be made a basis for lasting co-operation. 
In the European co-operative associations the "one man, one vote" 
principle is applied as a test to separate the true co-operative associa- 
tions from the pseudo co-operative. Since co-operation is founded 
on man, not on capital nor on products, there is no fundamental 
difference in principle where capital is eliminated and product is 
substituted as the basis of voting and control. The control of a 
co-operative association should be founded on the equality of mem- 
bership, whether the member contributes a large or a small volume 
of business. It is the members who, as men, co-operate in these 
organizations. 

There is a strong sentiment against the "one man, one vote" 
principle of voting when first presented to the average producer. 
The large producer fears control by smaller interests; the small 
landholders, domination by their larger neighbors. The history 
of the co-operative movement, both in Europe and in the United 
States, shows clearly that this adverse sentiment is a prejudice 
rather than an actual weakness in practical operation. Equality 
of membership strengthens the desire to co-operate, and men work 
together in business harmony just as they now do in the equal control 
of churches, schools, and in governmental responsibilities. 

REFERENCES FOR FURTHER STUDY 

Haney, Business Organization and Combination. 
Marshall, Readings in Industrial Society, pp. 714-79. 



CHAPTER IX 
BASIC FEATURES OF ADMINISTRATION 

Purpose of this chapter: 

i. To see what, in general terms, is involved in business adminis- 
tration. 

2. To canvass present-day knowledge with respect to sound rules 
of action in the field of administration. 



In our preceding discussions of various business functions we have 
made it a point to conclude each discussion with a brief consideration 
of an appropriate way to organize the department at issue. We 
have now reached a stage in our study where it is worth while to raise 
the general question of what is involved in administration. We are 
primarily concerned with business administration, but this general 
question may well be considered with public administration, school 
administration, and other possible forms of administration in the 
background of our thinking. 

There has been a quite considerable volume of writing directed 
at the question, "What. are the fundamental 'laws' or 'principles' of 
administration?" The problem is too new for a conclusive answer. 
The following, therefore, represents only an approach to the answer. 

We have not troubled ourselves greatly in this course over terms 
and definitions. It is best, however, in the next few pages, to be 
fairly definite in our use of certain terms. Let us arbitrarily (see 
pp. 2, 3) use the term administration to include (a) policy formation, 
(b) the planning and setting up of the organization, and (c) the run- 
ning of the organization. Let us, furthermore, note that it is something 
of a misnomer to ask for "principles" or "laws" of administration. 
Administration implies action and it is more appropriate to speak of 
sound rules of action in the field of administration than it is to speak 
of principles or laws. True enough, these rules of action may depend, 
for their appropriateness, upon some background scientific laws, as 
we shall later see. But that is another matter. 

We address ourselves, accordingly, to the question, "Can we 
formulate sound rules of action in the field of business administra- 
tion ? " Frequently a specific problem clarifies issues. Let us assume 

756 



BASIC FEATURES OF ADMINISTRATION 757 

that John Jones, mature and able but largely innocent of business 
knowledge, asks us to tell him how to go about determining what 
are sound rules of action in this field. As I conceive it, our answer 
might well run as follows: 

I. Any action should be in terms of the phenomena — facts — in 
which the action is to occur. The first task, therefore, is that of secur- 
ing an appreciation of business facts, or data. We cannot now stop to 
state the details of the enormous mass of data upon which action is 
to be taken. We can only point out certain elementary considerations 
connected with securing acquaintance with the necessary facts. 

First of all, remember that classification is an indispensable aid 
in securing a knowledge of business facts. They are so multitudinous 
that it is absolutely futile to try to survey them as isolated units. 
They must be taken in groups. Any grouping which is useful is a 
good grouping, and the one upon which we have based our study of 
business data is the functional grouping shown on page 15. Whether 
one expects to become acquainted with business facts through personal 
contact or through study of the experiences of others as set forth in 
printed volumes, he will find this classification an aid to understanding. 

But this is the merest beginning. These business facts or 
phenomena have their roots down deep in basic sciences such as 
physics, chemistry, the earth sciences, and the social sciences. To 
cite only one illustration, the business phenomenon of a differential 
wage system reaches back into such realms of study as psychology, 
history, and mechanics. There is no end to the amount of study 
which may be given to business facts if one cares to go below the 
surface. No one human being could possibly have a deep knowledge 
of all the basic sciences of business. On the other hand, one who 
expects to "administer" in the realm of business facts will do well to 
have a decent understanding of the main principles of the various 
sciences. In no other way can he really know business facts; in no 
other way can he administer in terms of fundamental principles as 
opposed to "rules of thumb." In other words, remember, secondly, 
that the study of business facts is not merely the simple direct study 
one might at first thought suppose. One must know these facts in 
terms of a knowledge of the underlying sciences. 

Bear in mind, thirdly, that new as our study of business admin- 
istration is, we have already reduced many of the relationships of 
these facts to "standards," and one may wisely be on the alert for 
these standards. In this course we have seen financial standards, 



758 BUSINESS ADMINISTRATION 

standards of labor performance, standards of sales and purchase 
performance, and many others. Admittedly, our present standards 
are not all good. Some are indifferent. Some are positively bad. 
If, however, we come to know business facts in terms of the basic 
sciences we may confidently look forward to a steady and rapid 
increase of good standards. That is, indeed, the fundamental idea in 
so-called scientific management.' 

To summarize, in trying to arrive at good rules of action in business 
administration one must know business facts, and if one wishes to 
go far he must know them (a) in terms of an appropriate scheme of 
classification, (b) in terms of underlying scientific principles, and (c) 
in terms of standards of performance. 

II. All this is merely preliminary to developing rules of action. 
Let us now assume that we are to lay down rules of action with 
respect to the administration of some entirely new project. Any 
project whatever may be chosen as an illustrative case. 1 In any novel 
project one will not go far astray in laying down the following as an 
appropriate chronology of action. 

i. The first thing to do is to get clearly in mind your objective. 
In most cases this objective should not be visualized or stated in 
terms so general that action is likely to be diffused and uncertain. 
It may be that a large objective must be narrowed down or, in some 
cases, broken into sub-objectives. It goes without saying that an 
oojective can be set only in terms of the facts involved. 2 

2. With the goal or objective, or objectives, in mind an appropriate 
second step is the selection of the proper road by which to reach the 
goal. (This may be called either a second step or a, part of the first 
step, as one chooses.) In most cases, there is not one but several 
roads to a business goal and a phase of policy formation is the definite 
decision to use a certain road, or roads, to the exclusion of others. 3 

1 The setting up a school of business in an established university may perhaps 
be kept in mind as an illustrative case, since the students will know the main facts 
reasonably well and there is an advantage in discussing a case where all have 
much the same background of factual knowledge. 

2 To follow out the illustration suggested, the objective "setting up a school 
of business" is too vague, It must be reduced to more specific terms. Is this 
school of business to prepare people to be managers and administrators or to be 
clerks ? Is it to train only in terms of money-making or also in terms of social 
service? It will be noticed that the determination of both objective and sub- 
objectives is a phase of policy formation. 

3 Again following out the suggested illustration, once the objective is clearly 
defined to be, let us say, that of preparing for administration, what parts are to 
be played by field work, discussion method of instruction, lectures, etc. ? Again, 



BASIC FEATURES OF ADMINISTRATION 



759 



3. Having selected the route (routes) which shall be used to arrive 
at the determined goal (goals), the next series of steps to be taken in 
an enterprise of even moderate size is: (a) Plan the organization and 
control system which are to be used, and (b) instal them. Both 
these steps must be in terms of the facts at issue (see pp. 778-88). 

4. Operate the organization you now have. 

III. A review of the last few paragraphs will show that they have 
been concerned with what to do. No rules of action have been sug- 
gested concerning how to do it. For these rules you are referred to 
Selection 5. (Pages 813-23.) 

The foregoing may all be summed up in diagrammatic form thus: 



In the 

light 

of 



Business facts which 


One can 


should be classified 


follow 


and understood in 


certain 


terms of basic sciences 


rules of 


and reduced to 


action 


standards 


on 





and can 
also 


What to do 


follow 


in business 


certain 


administration 


rules of 




action 
on 



How to 
do it 



It is a point having some significance that such an outlook on 
rules of action in business administration is likely to cause one to 
reject the commonly accepted dictum that it is not possible to train 
for the higher reaches of business administration involved in policy 
formation. There seems to be no reason why, as our knowledge of 
business facts in terms of the basic sciences grows and our awareness 
of what is involved in forming business judgment increases, we may 
not progress in our training for policy formation. No doubt it is a 
hard task and no doubt our knowledge will develop slowly, but there 
seems to be no good reason for regarding that field as forbidden 
ground. Quite the contrary. 

The readings in this chapter are arranged in accordance with the 
following plan: The first selection discusses the mental aspects of 
administration and shows the technique of forming a business 
judgment. Selection 2 points out that there is no single, unvarying, 
correct form of organization but that the organization must be in 



in securing a competent faculty, choice is to be made between, for example, 
slow development of young men or selecting mature men at high salaries from the 
teaching or business worlds. It will be noticed that we still have' questions involv- 
ing policy but we are now also getting over into the realm where an organization 
is being planned. Final decision on all these points should be in terms of the 
facts of the particular case. 



760 BUSINESS ADMINISTRATION 

terms of the facts of the particular case. Selection 3 reviews some of 
the current utterances on the essential components of organization 
and management, and Selection 4 shows the more outstanding types 
of organization. One. might, perhaps, call them standards in the field 
of organization. Selection 5 is a "how" selection (worthy of very 
careful study) which in some sense summarizes the "how" features 
of all the preceding selections. Selection 6 reminds us again of 
some of the forms of the measuring and communicating aids which 
are at the disposal of the administrator. The chapter closes with a 
glimpse of what is involved in the industrial leadership of today. 

PROBLEMS 

1. "The problem of management consists in the practical application of 
two great intellectual processes: analysis and synthesis." Be sure you 
can explain what the writer has in mind. Are, then, the principles of 
management simply the principles of any sound mental effort ? 

2. It is said that synthesis precedes analysis. Does it not follow analysis ? 
Can the two be independent ? 

3. In the realm of business administration, what is the function of instinct ? 
memory? habit? reason? 

4. Assume that you are "up against a blank wall" in some problem. 
Outline a good technique of handling this situation. 

5. What conditions determine fertility of suggestion in the solution of a 
business problem ? How do you account for the fact that occasionally 
someone who has been regarded as quite mediocre "suddenly" becomes 
a first-class person ? 

6. What is the function of the associative process in business administra- 
tion? 

7. Defend the position that training for business should include courses 
whose bearing on "business" seems very indirect. 

8. Take some problem and, by introspection, see if you follow the steps 
indicated on pages 768-78. 

9. "We shall never be able to reduce policy formation to a set of rules. 
We can do little in the way of formal training in this field." Do you 
agree ? 

10. Lough says that the basic managerial traits are: 

a) Health 1 ,. n , . , 
' _ ) chiefly physical 

0) Energy J 

c) Observation 1 

d) Concentration I chiefly mental 

e) Judgment J 

/) Confidence! , . „ „ ,, 
J ' ... > chiefly affective 
g) Ambition J 



BASIC FEATURES OF ADMINISTRATION 761 

h) Persistence' 

i) Reliability * chiefly volitional 

j) Control 

Would you modify this statement ? Does it contradict the material 
in this chapter ? 

11. "All organizations will differ somewhat from one another, because the 
objects, the results that are sought, and the way these results must 
be obtained are different; and, moreover, the material out of which 
the organization is made, differs in kind." What does this mean? 
If true, how can organization be profitably studied ? 

12. Define or explain: {a) continuous analytical industry, (b) assembling or 
intermittent or interrupted industry. In which is the control problem 
more difficult ? 

13. How should you organize the following enterprises: (a) the removal 
of the snow from the streets of Chicago after a heavy storm; (b) to 
obtain information for the government concerning industrial conditions 
in various plants working for the government, and report in three 
weeks ; (c) same as (b) but given six months for the investigation ? 

14. Draw up a list of reasons against the idea that there is one universal, 
correct form of organization. Do the reasons convince you ? 

15. "Thus we know pretty definitely the factors that make for organization. 
They are structure, lines of authority, responsibility, division of labor, 
system, discipline, accounting records and statistics, esprit de corps; 
but when we attempt to determine the parts played by these factors, 
we find that their relative importance changes with the purpose, condi- 
tions, and materials." Is this a statement of principles of organiza- 
tions ? If not, what is it ? 

16. Jones lists as administrative principles (1) the measurement of author- 
ity; (2) division of functions; (3) choice of persons; (4) co-ordination; 
(5) co-operation; (6) the systems of orders; (7) the system of reports; 
(8) information; (9) promotion; (10) the normal incentive; (11) admin- 
istration and human nature. What do you think these are ? 

17. Emerson says there are twelve principles of efficiency "so constant, so 
true, that they may be used as gauges" of the efficiency of "any 
industry, any establishment, any operation," viz.: (1) ideals; (2) com- 
mon sense and judgment; (3) competent counsel; (4) discipline; 
(5) the fair deal; (6) reliable, immediate, and accurate records; (7) 
planning and dispatching; (8) standards and schedules; (9) standard- 
ized conditions; (10) standardized operations; (11) written standard 
practice instructions; (12) efficiency reward. What do you think 
these are ? 

18. "Management is teaching." What idea is this quotation trying to 
express ? 



762 BUSINESS ADMINISTRATION 

19. "The most important problem is that of getting the right man for the 
head of the company. And if you have the right man, the choice of the 
type of management may safely be left to him." Does this dispose 
of the question whether there are principles of management ? 

20. "We are wasting a ]ot of time talking about organization and the like. 
There is nothing to organization but leadership. What we need to 
study is the psychology of leadership." Do you agree? 

21. "Organization and system are something forced on us by the necessities 
of the case. They have no virtues in themselves. They add nothing 
to leadership, but if poor, they may detract from leadership." Explain. 
Do you agree ? 

22. "Just as the manager needs good organization and standards for routine, 
so he needs a broad background and philosophy with which to meet 
emergencies." How can a manager prepare for these emergencies ? 

23. "The science of organization insists that lines of authority and lines 
of communication shall be carefully outlined." What does this mean ? 

24. "Along with responsibility must go commensurate power or authority." 
Do you agree ? If so, is this a "law of management" ? 

25. "The sum and substance of control in a large plant is contained in this 
statement: We should have centralization in policy making and decen- 
tralization in execution." Comment. 

26. "There are two elements in the control of work — desirability of exercis- 
ing foresight, and the necessity for preserving flexibility — which are 
antagonistic." Can they be reconciled ? If so, how? 

27. What types of industry or undertakings are apt to find the military 
type of organization the best? Which are apt to find the functional 
type the best form ? 

28. "The vital defect in modern organizations of business, particularly of 
the military type, is the foreman system." What does this mean ? 

29. "The functions of staff and of line are not antagonistic; they are not 
rival and alternative types of organization." Do you agree? 

30. "If there is any one leading lesson in the Unit System for the average 
manager of an industrial establishment, it is the insistence on the 
psychological value in every man signing his name for what he is indi- 
vidually responsible, and nothing more." Explain. 

31. If you wish to pick out one idea as the dominant one, what would that 
idea be in the case of line organization? staff organization? com- 
mittee system ? Taylor scheme ? Which scheme is most in line with 
the human analogy cited on page 808 ? 

32. Place the organization of the following activities in terms of the various 
forms of organization which have appeared in the preceding questions : 
(a) a baseball team; (b) the work of a university; (c) the work of a 
church; (d) an intercollegiate debate. 



BASIC FEATURES OF ADMINISTRATION 763 

33. "How is one to draw up an organization scheme? My answer is that 
he must break up his problem into its component parts and then must 
organize to solve it on the simple basis of opportunism — doing what he 
can as he can." Do you agree ? If you accept this position are you 
forced to conclude there are no principles of management ? 

34. "The mechanism of management must not be mistaken for its essential, 
or underlying philosophy. Precisely the same mechanism will in one 
case produce disastrous results, and in another beneficial." Why, or 
why not ? 

35. Are Taylor's functional foremen a principle of management or a 
technical device or an illustration of some principle of management or 
something else ? 

$6. "The regulative principles of the art of management are three: (a) the 
systematic use of experience; (b) the economic control of effort; (c) the 
promotion of personal effectiveness." Does this cover all the points 
raised in questions 15, 16, and 17 ? 

37. What is the relationship between accounting and statistics? between 
standards and records ? 

38. How do you account for the great development which has taken place 
in the field of business analysis in the last generation ? 

39. "It is evidently more economical to produce each month about the 
same quantities than to run at a forced rate for one or two months and 
then drop below normal." How does the budget help to bring this 
about ? 

40. "As a matter of fact, a definite and binding budget, which can be 
debated and settled by all the responsible officials and directors of a 
company at the beginning of a fiscal year, is a highly effective method 
of securing the unity of purpose which is an essential factor in every 
efficient organization." Explain. 

41.- "Budgets should be both annual and monthly." Explain why this 
would be advantageous. 

42. "The departmental budgets are especially valuable in holding depart- 
ment heads to given standards." Just how ? 

43. Answer the objection to budget-making that a particular business 
will fluctuate widely with business conditions and will not run in a 
uniform channel. 

44. "Budgeting may be all right for a large business but it is a waste of 
time for a small one. It is even worse, in that it tends to prevent 
prompt action." Do you agree ? 

45. "The diversification of industry and the constantly increasing necessity 
of depending upon indirect supervision and management together with 
rapidly changing business conditions necessitates the use of scientifically 
prepared forecasts." Why? How may these forecasts be prepared? 



764 BUSINESS ADMINISTRATION 

46. Regard the following organization chart as designed merely to raise the 
question of how to organize to care for standards and records (see 
pp. 757-58) in business. The dotted line shows liaison connections. 

General Manager 



Production Finance Standards and Personnel Markets 

I I Records I I 



What does the chart imply with respect to the handling of standards 
and records? What is the implication of the use of the word 
"standards" ? Would this department handle the budget ? 

47. "The measuring aids of business management." Put content into the 
expression. 

48. "The handmaidens of the new administration." Explain. 

49. "The business manager is being transformed from a mere owner of 
private property into a responsible agent, exercising delegated author- 
ity." Explain. 

50. "The whole situation conspires to create an opportunity for a new race 
of executives which shall justly appreciate the various classes of responsi- 
bility resting upon it." Put content into the phrases (a) "the whole 
situation"; (b) "classes for responsibility." 

51. "A new and larger conception of the function of business leadership 
is called for." Explain. 

52. An investigation was made recently into the promotional advancement 
of many hundreds of business executives. In the case of higher execu- 
tives they seem quite as likely to have been taken over from some other 
very different line of industry as to have come up through the one 
they are now managing. Do you think this is typical? If typical 
is it fortunate or unfortunate? What bearing has your answer on 
training for management ? 

53. How do you account for the fact that good administrators are ordinarily 
highly paid men ? 

1. THE MENTAL ASPECTS OF ADMINISTRATION 

A. MANAGEMENT AND ITS TWO GREAT INSTRUMENTS 1 

In any industrial undertaking there are two elements present, 
which, though sometimes merging into each other, and always 
exerting reciprocal influence, are nevertheless quite distinct in their 

1 Adapted by permission from A. H. Church, The Science and Practice of 
Management, pp. 1-25. (The Engineering Magazine Company, 19 14.) 



BASIC FEATURES OF ADMINISTRATION 765 

essence. The first of these is the determinative element, which 
settles the manufacturing policy of the business — what to make — 
and the distributive policy — where to sell and by what means. 
The second is the management element, which takes the policy 
as determined and gives it practical expression in buying, making, 
and selling. 

Of these two elements, which are not infrequently combined in 
small businesses, the first — the determinative — represents the higher 
and scarcer faculty. The larger the business, the more difficult 
will it be to obtain men capable of adequately filling the exacting 
demands for judgment, foresight, courage, and experience which 
decision on large points of policy sets up. The danger in vast organi- 
zations commonly lies, not in any prospective failure on the side of 
the management element, for in this department the assistance 
of all kinds of experts can be obtained; errors, moreover, are of less 
vital consequence, and their results can be more quickly reduced to 
safe proportions. It is failure in the determinative element that 
pulls down flourishing businesses. When the general of an army 
blunders, it may easily neutralize the army's efficiency as a fighting unit. 

The time has, perhaps, not yet come when we may reduce the 
determinative element to a body of principles, or even working rules. 
It contains, today, too many unknown and variable factors. The 
following, therefore, makes no attempt to deal with this aspect of 
industry; it covers the element of management alone. 

The problem of management, broadly regarded, consists in the 
practical application of two great intellectual processes. What- 
ever the end aimed at, whether the conduct of a military campaign 
or the manufacture of an industrial product, the processes involved 
are those of analysis and synthesis. In proportion as analysis is 
keen and correct, and synthesis is sure and unerring, so will be the 
resulting efficiency. If our power of. synthesis is less than our power 
of analysis, academic and theoretical "systems" will result. If, on 
the contrary, we neglect analysis and force synthesis without having 
shrewdly studied our ground, some, and even considerable, practical 
success may result, but there will be a great waste of opportunity 
and failure to attain the most efficient results. 

The neglect of analysis and the forceful use of synthesis are 
typical of the successful businesses of the past. The strong, shrewd, 
"practical" man could afford to neglect a careful analysis of his 
problem, because he had a very large margin of profit to draw on. 



766 BUSINESS ADMINISTRATION 

His wastes were great, his lost opportunities many, but he knew 
nothing about them and cared less, because his operations were 
successful in proportion to his expectations. If his profits were not, 
as we can see now, as large as they should have been, they were at 
least as large as those of everyone else. 

During the last fifteen years there has been a considerable develop- 
ment of the art of analysis in the problems of management. The 
early beginnings of this movement were characterized by a desire 
for more exact knowledge. It began to be realized that manufactur- 
ing is, in fact, made up of a long series of very small steps, and that 
it is desirable to ascertain the money value of these steps, so that 
comparisons may be made. In this way the movement toward cost 
accounting began and presently reached a high state of development. 

The next step on the path of development of the practical use 
of analysis was due to the desire of employers of labor to find some 
satisfactory basis for rewarding it according to results. 

To meet this need, the particular kind of analysis now known as 
"time study" was rediscovered. 

So far we have been considering the instrument of analysis as 
applied to the individual piece or component, or, to use a convenient 
but unbeautiful word, to the job. Once, however, that analysis set 
out on its career, its sphere of action steadily widened. 

The routing of product and the layout of machines is, then, a 
further development of the instrument of analysis that has very 
important bearing on efficiency. It is of course nothing novel. New 
plants have always given some attention to the matter. But its 
exact study, its investigation by charts and diagrams, the adaptation 
of buildings to special agreement with their uses, the careful scrutiny 
of methods of transporting product within the plant — all these are 
very modern applications of the instrument of analysis, which are 
having important economic results. 

It is evident that all this activity — the separate kinds of effort 
involved in acquiring material, bringing it into storage, moving it 
from place to place at the right moment, providing drawings and 
instructions, communicating them to the persons concerned, testing 
the product, and getting it out of the plant by a given date — involves 
a large number of steps, in any of which considerable inefficiency 
may exist without any more noticeable result than a general slug- 
gishness of working, which in its turn may have come to be regarded 
as the natural condition in the plant. It is obvious, therefore, that 



BASIC FEATURES OF ADMINISTRATION 767 

here is a field for the instrument of analysis in which important 
laurels may be expected to be gathered. 

The modern name for the organization which is, or should be, 
built up on a thorough analysis of the different activities concerned 
in the movements of material and instructions varies according to 
the fancy of the user. By some it is called "planning," by others 
" dispatching," but by whatever name it is known it has always 
been in existence in all plants from the beginnings of the factory 
system, for the simple reason that business could not be done without 
it. The only difference between modern types of planning and the 
older practice is that, today, it is recognized as a subject of analysis, 
and that the planning department, or by whatever name it is known 
is not merely a haphazard outgrowth of the business but is organized 
after a careful analysis of the needs of the plant, with special reference 
to the kind, urgency, and aim of the operations carried on. 

In the foregoing paragraphs we have considered the principal 
applications of the instrument of analysis as found in modern 
industrial management. Whatever progress has been made in the 
past decade or two is due principally to the revival of this important 
instrument and its application to some of the most pressing problems 
of management. But there is one thing that must not be over- 
looked. Analysis is not a constructive instrument. We can make 
nothing by its aid. It distinguishes, it provides very accurate 
knowledge, it eliminates, but it does not build. That is the task of 
synthesis. 

What, then, is synthesis? What kind of activities are grouped 
under that head ? In what does it differ from analysis, and in what 
practical ways is it applied? These are interesting questions and 
will be briefly discussed. 

Just as analysis is the art of separating and dissecting, so syn- 
thesis is the art of combining. As a practical art it naturally pre- 
cedes analysis, or, more correctly, it precedes conscious analysis. 
While the elements of a problem are simple, the mind, intent on its 
aim, analyzes unconsciously to a degree sufficient for its needs. But 
in proportion as the number of elements grows — and in modern 
industry they have grown to a very large number — then conscious 
analysis must be brought into play, not to supersede but to supple- 
ment the operations of synthesis. 

The art of management up to a few years ago was wholly carried 
on by synthetical methods. In the industrial sense, synthesis is the 



768 BUSINESS ADMINISTRATION 

combination of the faculties of men — that is, their capacities to do 
work of various kinds, with material — that is, with some object on 
which different kinds of work could be performed. Nothing what- 
ever of the necessity for employing the synthetical method has been 
removed or superseded by the introduction of analysis. The old 
management has not been improved out of existence. It has not 
been even diminished in importance. It has only been given a new 
tool or instrument — an instrument of study, a microscope, some- 
thing by which the true inwardness of problems may be searched out, 
instead of having to rely on their surface appearance and their 
face value. The old problems of management still remain problems, 
still require synthetical solution, but the chances of their correct 
solution are greatly aided by the modern uses of analysis. 

The main distinction between synthesis and analysis in this 
connection is that synthesis is concerned with fashioning means to 
effect large ends, and analysis is concerned with the correct local 
use of given means. The view taken by synthesis is a wide and 
comprehensive one; it surveys the whole field of action; its great 
task is to determine "what to do." The view taken by analysis, on 
the other hand, is a narrow and limited one; it concerns itself with 
the infinitely small. Its task is to say "how to use certain means 
to the best advantage." 



See also p. 844. The Range of Time and Motion Study, 

p. 850. The New Industrial Leadership, 

p. 588. Time Study, 

p. 589. Motion Study. 

p. 354. An Organization of the Sales Department. 



B. AN ANALYSIS OF "BUSINESS JUDGMENT" 1 

[The student will do well to bear in mind that the expression 
"business judgment" is used in different senses by different persons. 
Some use the expression in an inclusive sense, meaning the formation 
of a judgment on the basis of objective and definite data when such 
data are available and meaning also the formation of a judgment 
when the data are not so satisfactory; when the act seems almost 
intuitive, indeed. Others use the expression in a narrower sense 
with particular reference to those cases where the data are not in 

1 By F. A. Kingsbury. 



BASIC FEATURES OF ADMINISTRATION 769 

simple and satisfactory condition. It will be apparent that the 
following selection uses the term in its inclusive sense.] 

What is often called "business judgment" is, like judgment in 
any other field, a complex process involving usually a whole series 
of interdependent judgments and inferences. To this process the 
psychologist commonly applies such terms as "reasoning," or "pur- 
posive thinking," or "reflective thinking," distinguishing it sharply 
from that casual, aimless sort of revery sometimes dignified by the 
name "thinking." The types of activity involved in reasoning 
about a business problem, however much they may differ in content 
and detail, are fundamentally like those involved in reasoning about 
problems of law, medicine, literature, or science; and with such 
qualifications as are hereinafter pointed out, an analysis of the 
elements in an act of purposive thinking about any sort of problem 
applies as well to thinking about business problems. 

A functional or behavioristic psychology regards reasoning, like 
instinct, habit, and memory, as primarily a way in which the indi- 
vidual adjusts himself to his physical and social environment, that is, 
as a method of solving problems, although on a higher and more 
complex level than the other ways named. Instincts provide 
unlearned (i.e., inherited) methods of meeting in a stereotyped way 
certain sorts of problematic situations which are relatively universal 
for the race. Habits are individually acquired methods of solving 
problems which recur in one's experience sufficiently often to become 
more or less automatic in their operation. Memory provides a 
method of problem-solving through recalling ways in which one has 
previously met similar situations. But where instincts, habits, and 
memories give us "old" solutions, it is the function of reasoning to 
provide workable, "new" solutions for types of difficulty hitherto 
not met. This is made possible by the selection and utilization in 
new ways and in new combinations of the effects of previous 
experience. 

In behavioristic terms an act of reasoning would be described as a 
protracted act or series of interdependent acts called forth by some 
situation in which behavior is thwarted by an obstacle, real or anti- 
cipated, which cannot be directly resolved by the simpler habitual 
or instinctive mechanisms. In successful reasoning the delay in 
consummating the act permits the functioning of discriminative and 
integrative (associative) processes which lead to behavior tending 



770 BUSINESS ADMINISTRATION 

to relieve the original difficulty. The formal mechanisms in which 
these discriminatory and integrative processes are embodied may be 
one or more of several kinds, varying with the habits of the individual 
and the nature of the materials, and including vocal and subvocal 
reactions, imagery of various verbal or concrete types, and incipient 
or even overt motor impulses and attitudes. The precise character 
of these mechanisms is of less significance that the use made of them. 

Any complete act of reflective thinking, whether it deals with 
business problems or other problems, may be described as involving 
the following elements: 

i. A difficulty, real or anticipated, not suggesting directly any 
method of solution recognized as feasible. 

2. The definition of the problem and location of the difficulty, by 
analysis of the situation into its essential and nonessential factors; a 
comparative and discriminative process. 

3. As a result of such location of the essential factors, the sug- 
gestion of a partial or complete solution, through the ordinary 
mechanisms of associative suggestion. 

4. Elaboration and critical evaluation of the suggested solutions 
to ascertain their probable worth. 

5. Acceptance of solution and consequent action, if valid; or 
rejection, and repetition of stages 2,3, and 4 until satisfactory solution 
appears. 

It is not, of course, always possible to trace these as temporally 
distinct and successive stages. In certain types of situation some of 
these processes may be subordinated *to or merged in others. Never- 
theless, we may use these divisions as a basis for a further analysis 
and description of the processes commonly involved in reasoning. 

1. "A difficulty, realized or anticipated, not suggesting directly 
any method of solution recognized as feasible." It seems trite, yet it 
is exceedingly important, to bear in mind that no purposive thinking 
ever occurs except on occasion of a problem to be solved, a difficulty 
to be overcome. The problem may, perhaps, be an intellectual one, 
arising from apparent incompatibility between accepted beliefs. In 
such cases, the immediate problem may be to "explain" the situation. 
Thus, a manufacturer who has saturated himself during the war and 
post-war period with the conviction that the sure way to large profits 
is through buying large stocks of materials for future use, now finds 
himself faced by the conviction that he is not making profits, but is 
suffering losses. His first problem is to readjust and revise these con- 



BASIC FEATURES OF ADMINISTRATION 771 

flicting convictions, to find an explanation; afterward he will decide 
what to do about it. But in business judgments, the difficulty is 
usually a practical one; here is a concrete situation calling for prompt 
action — growing competition, increasing complaints, threatened litiga- 
tion, financial stringency, a destructive fire — but the way to action is 
blocked. Were there no blocking or inhibition present, in the form 
of fear, uncertainty, doubt, or powerlessness to act, some kind of 
action, either reflexive, instinctive, or habitual, would follow at once. 
The fact that the impulse to act is somehow inhibited is what puts 
the whole situation on the level of rational and volitional action. 

Such problems may be concerned either with setting up ends to 
be attained, or with finding means for the attainment of ends; 
although inasmuch as most ends are instrumental to some more remote 
end, the distinction is not for present purposes a vital one. Again, 
the problem may call for the making of decisions which are designed 
to influence a large number of acts (as in the formulation of some 
business policy); or the intention may be to affect only a single 
action. 

The difficulty may present itself in various forms: 

a) The situation may suggest no course of action whatever; a 
"blank wall"; a "baffled feeling"; as, for example, when one meets 
with a totally unexpected disaster. 

b) The situation may suggest a possible course of action, but of 
doubtful value; i.e., there are verbal or other inhibitions present, 
characteristic of the attitude of doubt, which prevent action along 
the line suggested; as, for example, when one is confronted with the 
opportunity to obtain, at an abnormally low price, a stock of goods 
larger than one ordinarily feels able to buy. 

c) The situation may suggest two or more alternative courses of 
action whose relative value is not evident. That is, it is not clear 
which promises greater ease of accomplishment, economy of time or 
expense, certainty or quantity of result, freedom from annoying after- 
effects, or other advantage. Whether or not all these considerations 
present themselves vividly, the psychophysical mechanisms they 
symbolize may be active to such a degree that no one alternative leads 
to free, unimpeded action; the alternatives block one another, until 
such time as reasoned reflection succeeds in making one of the alterna- 
tives dominant. An example would be the problem of deciding 
between several possible sales policies or methods — selling through 
jobber, direct to retailer, to mail-order house, direct to customer, etc. 



772 BUSINESS ADMINISTRATION 

In situations of this kind, where possible courses of action have already 
suggested themselves; stages 2 and 3 may be merged in stage 4, the 
deliberative criticism of the alternatives and of their anticipated 
consequences. 

2. The next stage, "the definition of the problem and location 
of the difficulty," is often synchronous with the first stage; that is, 
the problem makes its first appearance in very definite form. But 
many business problems are of a character so involved that the crux 
of the difficulty is not immediately apparent, and the situation has 
to be analyzed into its significant and non-significant factors. Thus, 
a slump in sales in a given territory may be due to any of a considerable 
number of factors, and a large part of the task of relieving this particu- 
lar difficulty consists in analyzing the situation into its factors, 
geographical, financial, personal, social, political, etc., and deter- 
mining which are significant and to what extent. Only then can one 
look for an adequate solution to suggest itself. The problem may, 
on analysis, define itself as essentially a problem of (a) putting in a 
more efficient salesman; (b) meeting prices or terms of a local com- 
petitor; (c) improving transportation or delivery conditions; (d) 
counteracting harmful propaganda; (e) making connections with 
new dealers; (/) stimulating present dealers to larger efforts, or 
something else. One or another of these, in turn, may call for still 
further definition. 

Defining the problem calls for the accumulating and examining 
of such facts as are likely to reveal the real nature of the problem, and 
isolate it from the mass of irrelevant and confusing attendant circum- 
stances. Here the definite adoption of an attitute of suspended 
judgment, pending the location of the difficulty, helps to inhibit the 
tendency to follow impulsively suggestions which in most cases would 
prove false leads, obscuring the issue and wasting time and energy. 

These more or less relevant facts may be gotten at either through 
casual observation or inquiry, or through systematic investigation 
(experiment, accumulation of data from records, etc.), and their 
accumulation is stimulated, guided, and facilitated by the recall (or 
reading of inquiry) of similar situations. If the facts in the case are 
too numerous or too complex to be held in mind while they are being 
reviewed, they may be systematically arranged so as to facilitate 
suggestions of solutions: (a) by use of pictorial or graphic devices; 
for example, tack maps of sales territories; charts analyzing a business 
organization; graphs showing fluctuations of price, output, etc.; 



BASIC FEATURES OF ADMINISTRATION 773 

diagrams of various sorts, etc.; (b) by statistical tabulations and 
analyses; (c) by outlines or summaries, written or verbal; (d) or 
even by the unsystematic jotting down of suggestions, lists of factors, 
arguments, etc. Often a pencil in hand serves as a stimulus to 
thought. 

Throughout this survey, a discriminative and selective activity 
has been going on. Certain factors have appeared which further 
the progress of thought (i.e., suggest associations) in the direction 
desired. Others suggest no associations beyond an attitude of 
negation. The latter are rejected from further consideration; the 
former, or the associates they suggest, carry the thinking process on 
to the next stage. 

3. "The suggestion of solutions"; the inference stage. During 
the analysis of the problem not only have certain factors suggested 
themselves as significant, but they have (often simultaneously with 
their appearance) suggested possible courses of action, or pointed the 
direction for further inquiry. This, of course, occurs through the 
ordinary associative mechanisms, and therefore implies previous 
experiences, first-hand or second-hand, involving similar elements. 
Very frequently this is the crucial point in business judgments. 
Mistakes in judgment are very often directly traceable to inadequate 
knowledge, and a consequent insufficiency of potential suggestions. 
Men fail not only because they "don't know," but because often 
they "don't know that they don't know." On the other hand, the 
successful "captain of industry" is very frequently a man of wide 
information concerning matters political, geographical, historical, or 
scientific, which to his smaller-minded contemporary seem irrelevant 
and useless. Nevertheless, this rich background of ideas and view- 
points enables him to anticipate the effects on general business condi- 
tions, and consequently on his own affairs, of apparently remote yet 
real influences, and thus to provide effectively against future contin- 
gencies. A wealth of experiences is of inestimable value in making 
for sound and ready business judgment, not only in providing direct 
suggestions, but in aiding in the organization, interpretation, and 
evaluation of other experiences. 

Often the intermediate associates which logically link situation to 
suggestion are not consciously present; one leaps from problem to 
solution without stopping to trace his path, and perhaps without 
being able to trace it if he tries. This occurs, of course, in those 
fields in which the individual is most practiced. It involves the 



774 BUSINESS ADMINISTRATION 

phenomenon called " associative shifting," where the chain of asso- 
ciates A-B-C-D-E is, by repeated practice, condensed into the 
direct association A-E. Such acts of mental habit are often called 
" practical judgments," and they constitute a considerable part of 
the everyday thinking of the business man. But in most new situa- 
tions, of course, they constitute only a fraction of the total reflective 
process. 

These suggestions of solutions may appear in various forms: 

a) One may recall some concept, term, formula, rule of procedure, 
or other verbal generalization which has been developed around 
previous experiences of this sort. This is the usual thing if the 
problem is of a sort that naturally leads to some categorical classifi- 
cation of the situation; it is therefore more common in such fields as 
legal reasoning, medical diagnosis, and other fields having a consider- 
able body of technical terminology than in most business situations. 
Nevertheless, inferences in business problems often assume the form 
of classifications of this, hat, or the other situation under such verbal 
generalizations as "safe," "be cautious," "likely to make trouble," 
"unprofitable," "risky," "speculative," "unethical," "good bargain," 
"worth investigating," or other categories which go far to determine 
what action shall follow. 

b) One may recall some specific previous situation, recognized as 
similar in its essentials, and the procedure there followed, with its 
consequences. 

$) One may feel impelled toward a certain course of action, 
suggested by some element of the situation, but not referable to any 
specific experience. 

Fertility of suggestion is affected by various factors: (a) Native 
ability, the inherent quality of brain structure which makes possible 
varied and prompt recall; in practice, the influence of this factor 
cannot with certainty be separated from that of other factors; (b) 
extent of experience or knowledge in the field concerned and in related 
fields (even though the relation may apparently not be close); (c) 
extent to which these experiences and ideas have been utilized, 
organized, or reflected upon, thus enriching, systematizing, and 
strengthening their associative connections; (d) degree of interest in 
the problem, and consequent attention and care devoted thereto; 
(e) completeness of analysis of the problem; (/*) systematic arrange- 
ment of data, as previously described. 



BASIC FEATURES OF ADMINISTRATION 775 

4. "Elaboration and critical evaluation of the suggested solu- 
tions." If the comparative, discriminative, and associative processes 
involved in the analysis of the problem and its suggestions for solution 
have sufficed to overcome whatever inhibitions to action were present, 
i.e., if they have been sufficient to establish an attitude of belief in 
the validity of the solution, decision and action will follow. In a 
complex situation the inhibiting influences are not thus easily resolved. 
If doubt remains, or if the case is as described in ic, wherein 
definite but not yet evaluated alternatives have already sug- 
gested themselves, elaboration and evaluation of the hypothetical 
solution is necessary. By "elaboration" is meant the consideration 
of the consequences, positive and negative, favorable and unfavorable, 
expected to follow from the adoption of the hypothetical solution. 
These consequences, suggested through the ordinary associative 
mechanisms (and hence, like other inferences, dependent on previous 
experiences), may perhaps take the form of imagery, whereby one 
pictures to himself the results in visual, auditory, motor, or other 
symbols; often the imagery assumes the form of a semidramatic 
rehearsal of the anticipated situation; or (as is more frequently the 
case with thinkers accustomed to deal with abstract relationships) 
they may be couched in vocal or subvocal word symbols. 

Usually these suggestions are in some degree affectively toned, 
either agreeably or disagreeably. That is, the suggestion of certain 
consequences is characterized by positive emotional reactions and 
kines theses, which we variously call feelings of approval, affirmation, 
or satisfaction, desire, liking, etc. Other suggestions are characterized 
by negative reactions of aversion, disapproval, dissatisfaction. These 
reactions play a central part in determining the outcome of the thought 
activity, since those reflective processes which arouse the negative, 
self-inhibiting type of reaction thereby tend to be dismissed from 
further consideration; while those arousing the affirmative, self- 
reinforcing type of responses determine the direction the reasoning 
process shall follow. Hence the importance of maintaining the 
critical attitude previously referred to, so that the case may not be 
closed through the urgency of some special emotional influence until 
the evidence is all in. What is called "good judgment" is in large 
degree the capacity for and habit of withstanding the strong desires 
or aversions which are urging action, until other considerations have 
a chance to be reviewed, their values appreciated, and a decision 



776 BUSINESS ADMINISTRATION 

reached in terms of far-reaching as well as immediate considerations. 
Conversely, "poor judgment" often connotes not lack of ability to 
foresee probable consequences, but habitually insufficient resistance 
to urgent impulses. In this connection it may not be amiss to call 
attention to the very common habit of making decisions in line with 
personal predilections, and bolstering them up with reasons worked 
out to make the decision look plausible — what the psychologist calls 
"post-rationalizations," and which are, of course, in the main 
irrational. 

This process of deliberation and evaluation of the hypothetical 
solution (or the alternative solutions — for indeed, most decisions 
resolve themselves into some sort of choice, even if no more than "to 
do or not to do") is then largely a matter of weighing emotionally 
toned, anticipated consequences. When one set of impulses succeeds 
in becoming dominant, i.e., in dissolving the inhibitions, action follows. 
This readiness to act constitutes the essence of the attitude we call 
"belief." But frequently doubt remains and action is suspended. 
Further critical testing is called for. This testing may be either 
(a) explicit (on the "action level," experimental) — by trying it out on 
a small scale before taking larger risks, to ascertain whether actual 
consequences correspond to those anticipated; or (b) implicit (on the 
"thought level," "rational") — -by (i) further comparison with similar 
or analogous situations whose consequences are known; (2) compari- 
son with other accepted general principles or formulas than those used 
in reaching the hypothesis; (3) comparison with testimony of authori- 
ties, persons or books, on similar or related problems; (4) sub- 
mission of data, methods, and conclusions to competent critics, to 
discover possible omissions or errors. 

The adequacy of this critical evaluation depends, therefore, on a 
variety of conditions. In business judgments (as in other kinds), 
these are emotional and volitional as well as intellectual. The value 
of critical foresight may be negated by ill-founded antipathies or 
prejudices. In business, even more than in other fields, correct 
judgments depend largely on the accuracy with which one estimates 
the probabilities of human behavior, either individual or collective. 
While scientific judgments largely involve insight into the behavior of 
non-human objects, and medical and legal judgments the correct 
reference of cases to certain categories, business judgment is largely 
concerned with contingencies of human behavior. Therefore, a 
correct comprehension of the influences that determine individual or 



BASIC FEATURES OF ADMINISTRATION 777 

mass behavior — likes and dislikes, ethical and aesthetic standards, 
customs and fashions, instincts and acquired tendencies, what people 
are likely to do or not to do under certain circumstances — is of primary 
importance in business judgment. 

5. Whereas the terminus of a scientific judgment may be the 
formulation, modification, or verification of a verbal generalization, 
practical judgments eventuate in more overt forms of behavior. The 
action need not follow immediately. The direct outcome of a reasoned 
business decision may be a more or less explicitly formulated program 
for future action, which is to be consumated when certain future 
conditions are realized. The realization of these conditions then 
automatically brings about this action, the psychologically crucial 
point being not the moment of action, but the moment of decision. 
If the program of action is designed to meet in a uniform way a large 
number of similar situations, we call it the formulation of a business 
policy. The determination of a policy usually involves consideration 
of a greater and more significant range of consequences than does a 
decision on a single act, which is not expected to produce such weighty 
or long-continued consequences, or stand as a binding precedent in 
the minds of all persons concerned. But apart from these minor 
differences, the psychophysical mechanisms are fundamentally the 
same in all acts of reasoning. 

To summarize: 

1. Acts of business judgment may be defective for various reasons: 
(a) failure to formulate problem correctly and definitely; (b) failure 
to discriminate between significant and non-significant elements in 
the situation; (c) experience and information inadequate to suggest 
associations; {<£) experiences recalled too imperfectly or too slowly 
for the exigencies of the situation; (e) unfamiliarity with concepts, 
terminology, technique, and practices prevalent in the field concerned; 
(J) data too poorly organized to suggest solutions readily; (g) infer- 
ences from incomplete and non-representative data; (h) insufficient 
interest, attention, and care; (i) failure to maintain critical attitude; 
liability to "snap judgment"; (J) emotional bias, giving too much or 
too little weight to various factors. 

2. Or, from a somewhat different standpoint, we may say that 
efficiency in business judgment depends on: (a) quality of brain 
structure; (b) aptness (native or acquired) for seeing similarities and 
differences in the field concerned; (c) practice in analyzing problems; 
(d) adequate knowledge of facts and principles, and readiness in 



778 BUSINESS ADMINISTRATION 

recalling them; (e) knowledge of and skill in using special forms of 
technique for getting and organizing data (experiment, statistics, 
etc.); (/) organizing data and keeping results organized as work 
proceeds; (g) exercise of care in getting sufficient body of data to 
insure reliability of conclusions; (ti) exercise of care in making as 
complete critical verification as circumstances permit; (i) main- 
tenance of critical attitude (suspended judgment) ; habitual resistance 
to immediate impulses. 

See also p. 649. The Significance of the Human Equation in 
Business Problems, 
p. 651. The Formation of "Judgments." 



2. THERE IS NO SINGLE CORRECT FORM OF 
ORGANIZATION 

A 1 

Various activities that are not industrial, such as the church, the 
civil government, the army, the navy, educational organizations, 
charitable organizations, all involve size and numbers and complexity, 
and they are all organized; but good industrial organization will be 
likely to differ from these other organizations, and all organizations 
will differ somewhat from each other, because the objects, the results 
that are sought, and the way these results must be attained, are 
different; and, moreover, the material out of which the organization 
is made differs in kind. 

It is, of course, true that there is much that is common to all 
effective endeavor: the definite knowledge of what one wishes to 
accomplish; the principles of directing and controlling effectively 
large numbers of people; making the most of different kinds of skill; 
the securing of co-operation, so that each one helps instead of hinders 
another; the systematic and orderly way of doing things, so that 
there are no neglected steps, no false movements, no lost time — 
are all common to good organizations of all kinds. But, with differ- 
ing purposes, the factors that make organization have varying 
importance. With one purpose in view, the principle of the division 
of labor for specialization of skill may be all-important; in another 
situation, this may become insignificant in comparison with the 

1 Adapted by permission from Russell Robb, Lectures on Organization, pp. 2-34. 
(Privately printed, 1910.) 



BASIC FEATURES OF ADMINISTRATION 779 

■ 
proper control and direction of large numbers. The problem in 

another organization may be the systematization and division of work 

mainly to bring order and efficiency into a situation of complexity. 

The significant feature in another case may be almost wholly a 

question of dispatch, where the question of economy even may hinge 

much more on the time required than on any other factor. Again, 

we may have success hinging upon systems of accounting, records, 

and statistics, where the accurate knowledge of costs and other 

details of the business and the system for securing these may be the 

central factor about which the organization is constructed. 

In the popular mind, perfect organization usually is associated 
with the army. The division of the men into companies and regi- 
ments, the clearly defined duties and authority of the officers, the 
discipline that secures precision in all evolutions and obedience to 
all commands of the superiors, suggest to most people the perfection 
of concerted action, and furnish the type to which they feel that all 
organizations should conform as nearly as possible. An army in 
modern times, with its different branches of service, its attention to 
commissary and sanitation, its great multiplicity of technical 
appliances of war, its connection with the activities of civil life, 
becomes very complex; but in the beginning, military organization 
was a necessity in order to direct and handle effectively large num- 
bers of men, and so to prevent the hordes who went fighting from 
being merely a mob. The great numbers acting together could not 
act effectively unless there were order and system in all their evolu- 
tions, and an organization binding the order and system together. 
Moreover, the product came in one supreme moment: the organiza- 
tion was for an emergency. Its whole success or failure was shown 
by the action of the army at a critical time; and for this reason 
military organization has taken a severe line, in which everything is 
subordinated to obedience and definiteness of procedure and certainty 
of predetermined evolution and action upon command. Authority 
and responsibility taper down with evenness, each one knowing his 
exact limitations and his part. Each one in authority must be 
trained to assume instantly all the duties of the one next above, for 
the captain of one moment may be colonel in the next. 

Military organization has contributed much to all other types of 
organization through its example of the value of discipline, the use- 
fulness of definite procedure, and the effectiveness in administration 
of placing responsibility, but it has been the cause of mistakes in 



780 BUSINESS ADMINISTRATION 

building up other organizations, through the forcing into prominence 
of the main features of a military organization when the end that is 
sought is much more influenced by other factors, when the necessity 
for control is less than for specialization of effort and for the co- 
ordination of different kinds of action. This becomes plainer when 
one considers, for instance, an industrial organization depending 
for its success very largely upon the ability with which the principles 
of division of labor are applied. There are many examples. The 
success or failure of the watch-industry would not depend upon 
instant obedience, upon definite evolutions of men, upon predeter- 
mined movement in emergency, upon a definite line of succession in 
authority; it would depend upon such things as study and care 
and economy in purchasing materials, upon the development of 
processes to make the most of each worker's special skill and ability, 
the saving of time in the handling of the product, the working of the 
plant to save interest and rent, the discovery of consumers, and 
the prompt delivery of the product. The main purpose is different 
from the main military purpose, and the organization must vary 
accordingly. 

Large and complex construction is often undertaken where, 
in the words of contracts, "time is of the essence." The need for 
the structure may be vital to the integrity of an important business 
already established. The saving in interest and in earning power, 
if the work is completed in months instead of in a year or two, may 
be a large amount. The organization for such an undertaking will 
not be the same as for deliberate construction systematized in all 
details for the lowest total construction-cost. It may be necessary 
to cut "red tape" that would be desirable in other situations, it may 
pay to take the chances of less thorough deliberation of plans, the 
lines of authority even may be changed — all because the relative 
importance of factors is changed. 

The construction of the great irrigating reservoirs in India, where 
a few years ago during the famine so many of the natives were em- 
ployed, furnishes a good example of the variation in organizations 
according to the material one has to work with. One can imagine 
approximately what sort of an organization would be necessary in 
most other places to undertake the vast excavations necessary to 
form reservoirs in great irrigating works: there would be a large 
mechanical equipment of steam-shovels, with the minor organization 
of drivers, mechanicians, and superintendents, the systems of records, 



BASIC FEATURES OF ADMINISTRATION 781 

of fuel-supply and repairs; the placing of equipment; the orderly 
procedure of the work; the great number of workmen to direct and 
supervise; the system of pay, shelter, commissary, sanitation — all 
would have to be molded into a great comprehensive organization. 
In India there were no steam-shovels, mechanicians, fuel-supply, 
repairs, shelters, or commissary. The excavation was done directly 
by hordes of natives in gangs of twenty or thirty, each with his or 
her basket, and one with his little "scooper" or koiti. When the 
basket was filled, it went on the worker's head and was carried to 
the dump, where the native received a small tag that entitled him 
to payment for one basketful of excavation. The workers consisted 
of gangs, over which were the foremen who furnished the laborers 
for the work. There was no system of housing, for there were no 
shelters: all slept on the ground in the open. There was no com- 
missary organization, for the workers ''found themselves," and in 
any case would have refused any food prepared for them, because 
of caste prejudice. The payment of workers required no elaborate 
system of pay-rolls and receipts, because each worker simply cashed 
in the tags he had received. No doubt those in charge of these 
Indian excavations had their problems of organization, but they were 
different from our problems, and probably the most of our approved 
systems would have been of about as much use as an American type- 
writer to a Chinese merchant. 

There are all kinds of industries, and one is perhaps as good as 
another for the purpose of illustrating organization. If one is 
credibly informed, the organization of some of the patent-medicine 
companies differs considerably from that of other manufacturing 
companies, and yet they are still ably organized. There is at least 
one where two or three rooms in a large building are devoted to the 
manufacture of the medicine, a minor function in the organization. 
The remainder of the building is largely devoted to a printing estab- 
lishment for the preparation of advertising matter, to advertising 
departments, correspondence-clerks, and stenographers. Here we 
have a manufacturing establishment, but the purpose and conditions 
require special attention to the office-system. The accomplishment 
of the purpose is not greatly affected by attention to manufacturing 
methods and details, but is very greatly affected by skill in advertise- 
ment and system in the departments where the real effort and most 
of the expense lie. 



782 BUSINESS ADMINISTRATION 

Most organizations have grown gradually, and the conditions 
surrounding this growth often influence greatly the form that the 
final organization takes. Long existence of customs and methods 
and the consequent knowledge of the plan throughout the organiza- 
tion may be of more importance than the features that might be 
secured by a theoretically better structure. It is understood, 
for instance, that the very successful Studebaker organization 
is administered by an executive committee of five members, each 
member of which is at the head of a functional department of 
the business. Committees are not ordinarily very effective as heads 
of undertakings. They have difficulty in reaching decisions, and one 
member is likely to prove dominant and carry his ideas without 
being responsible for the results. The Studebaker organization, 
however, has grown up about a family of five brothers, all able and 
active in the business. From small beginnings they had threshed 
out their problems together and had learned the art of conference. 
They had found how to draw from each his contribution to the 
general knowledge and to the particular question, and they had 
discovered ways of reaching conclusions without interminable dis- 
cussions or unplaced responsibility. One might hesitate to form 
a new organization on this plan, but he would just as surely fail to 
discard it when so completely established and so well proved in 
efficiency. In parts, at least, of many organizations one finds 
variations from the theoretically best plan on account of the person- 
ality or particular ability of important officers or heads. 

It will be unfortunate if the emphasis given here to the diversity of 
conditions and to the difference in the purposes of undertakings should 
be construed as an argument that no general principles can be applied 
to organization. It is intended simply to show that there is no 
"royal road," no formula that, once learned, may be applied in all 
cases with the assurance that the result will be perfect harmony, 
efficiency, and economy, and a sure path to the main purpose in 
view. This is not an imagined difficulty. We all are inclined to 
get a bit twisted toward some favorite panacea, and if one is to attempt 
to better a business organization, it helps greatly to be able to ap- 
proach the problem with an open mind, and not to have a special 
predilection toward a factor that one has somewhere found admirable. 

The gain from organization is so evident when it is applied to a 
confused situation, and the satisfaction so great in having affairs 
run smoothly, that, as we continue grouping forces and introducing 



BASIC FEATURES OF ADMINISTRATION 783 

system, we easily become convinced that we cannot have too much 
of it. Like the " diminishing returns in agriculture," however, the 
returns from increasing organization do not continue proportional 
to the efforts, and limits are reached beyond which one may well 
proceed with care. It becomes necessary sometimes to remind 
ourselves that organization, as an end in itself, is of no value. A 
business organization is for the purpose of accomplishing definite 
pieces of work, of arriving at a definite result with the least expendi- 
ture of labor and material, the smallest expenditure for plant, and 
the shortest time of use of the plant; and if organization does not 
prevent waste or enable us to get results attainable in no other way, 
it has no value. 

Now and then there are men who seem to go at once to the root 
of a question, and who, from a mass of detailed explanation, exposi- 
tion, and talk, seem suddenly to pick from the medley the two or 
three salient features — the things of such transcendent importance 
that all else drops away as if mere comment. Such men have a 
proper sense of proportion and the true sense of thoroughness, be- 
cause they do not get involved in detail before they have blocked 
out the plan. 

When it is urged that it is not worth while to follow all detail 
in every direction, when it is urged that one must first make sure 
that he knows in which direction it is most profitable, in a broad 
sense, to work, this must not be mistaken as advising a policy of 
"good enough," for it is not that; it is the policy of refusing to waste 
our resources on the non-essential and the ineffectual; it is being 
dissatisfied with the accomplishment of the infinitesimal in one direc- 
tion when accomplishment of magnitude is possible in another. 

B 1 

It is obvious that the organization of a plant will depend largely 
upon its size and the degree to which it is specialized. Increased 
size naturally brings with it greater subdivision of labor and the 
consequent need of added co-ordinative influences. Under the older 
and simpler systems of production, when small numbers of men 
were the rule, the relations between master and man were very 
simple. Each man was competent to perform any and all operations, 
producing perhaps the entire article himself. The instructions, few 

1 Adapted by permission from D. S. Kimball, Principles of Industrial Organiza- 
tion, pp. 68-70. (McGraw-Hill Book Company, 1913.) 



784 BUSINESS ADMINISTRATION 

and simple, were given verbally, and duplication in a modern sense 
was unnecessary. As the size of industries has grown, as specializa- 
tion and division of labor have been extended and as special or 
scientific knowledge has become more and more necessary, these 
simple relations have been forcibly expanded and the concerted 
labors of master and man have been replaced by administrative, 
planning, and constructive departments, to properly co-ordinate the 
work of which has become a study in itself. 

The tendency toward complexity in organization due to increased 
size is not so great, however, as that due to the character of the 
industry and the degree to which it is specialized. Manufacturing 
industries are, broadly speaking, of two general classes, namely, 
continuous and intermittent. In a continuous process the material 
goes in at the receiving end of the plant, is worked continuously, and 
appears at the shipping room as finished product. A continuous 
process may be either analytical or synthetical; that is, it may take 
some natural product and separate it into component parts or change 
its general form; as, for instance, the industries built on salt prod- 
ucts, ore, oil and sugar refineries, saw-mills, etc. Or they may take 
a few natural products and passing them through fixed processes 
build them up into some other form, as may be seen in paint works 
and wall-paper factories. In general, such industries deal only with 
a few raw materials, these passing in at one end of the factory and 
flowing, so to speak, through a number of fixed processes and passing 
out at the other end in the form of a limited number of finished 
products and by-products. The organization that the personnel of 
such a plant will most naturally take will depend on the character 
of the industry, but will, in general, be comparatively simple. 

Intermittent or interrupted industries, on the other hand, may 
take many kinds of raw material, carry them to any desired stage 
of completion, store the finished or semi-finished parts when neces- 
sary, and assemble the various kinds of finished product as the 
market requires. This finished product may cover a wide range 
both as to relative size and character. Ship-building plants, agri- 
culture implement works, and plants manufacturing electrical ma- 
chinery are excellent examples of interrupted industries which form 
by far the larger part of organized industry. The above classifica- 
tion, is, of course, not clearly defined; in fact, these types of in- 
oustry represent extreme cases rather than distinct classes. The 
natural tendency toward specialization constantly tends to limit 



BASIC FEATURES OF ADMINISTRATION 785 

the range of intermittent processes and this, in an extreme case, 
might reduce a factory of the intermittent type to one of the con- 
tinuous type. Many factories, indeed, have both continuous and 
interrupted processes in operation at the same time. Plants of this 
kind tend naturally to divide into departments and are naturally 
more complex in character than those of the continuous type. 

Aside from these considerations, the exact form of organiza- 
tion of any plant nearly always depends to some extent on the 
character and ability of the men available. Able men are always 
rare and the exact subdivision of authority and responsibility 
often depends on this factor rather than on a more logical basis 
of an abstract analysis of the problem. For this reason and the 
other reasons advanced above, it is not possible to formulate fixed 
rules for planning industrial organizations. There are, however, 
certain general principles that long experience has shown to apply 
to all forms of organization and that are, therefore, worthy of note. 



See also p. 565. The Control Problem Varies with Different 
Types of Industry. 



"That's the hardest question in business," exclaimed one of the 
half-dozen managers of distinguished enterprises recently asked to 
list the vital factors of control in an organization — to take apart the 
enterprises they have brought to success, and point out the ideas, 
policies, methods, and results which seem to them so important that 
the chief himself should have them under his eye and hand. 

According as different concerns emphasize one or another factor 
in their schemes of management, policies of executive control may be 
roughly divided under five headings: 

1. Detail management. — Most managers are driving themselves to 
their physical limit in the handling of the details of service, employ- 
ment, and especially finances. Some executives have been literally 
crowded out of this position by the growth of the business and have 
taken a stand at some point along the current of trade, where by 
watching every order, every credit, every contract or expense item, 
they can fairly judge and control the business. 

1 Adapted by permission from C. D. Murphy, Library of Business Practice, I, 
9-24. (A. W. Shaw Company, 1914.) 



786 BUSINESS ADMINISTRATION 

2. Money management. — Many proprietors and directorates 
guide their businesses entirely by ledger statements and throw upon 
subordinates hired to round out their ability all other matters relating 
to the conduct of the enterprise. In one case a directorate which is 
managing a business entirely as a matter of investments and profits 
has never seen the chain of stores from which its dividends come. 
A detail manager pledged to enthusiasm by a generous salary has 
authority over everything except financial policies. The disadvan- 
tages of this plan are that there is no proprietary control of the 
methods used in dealing with the trade, nor of the spirit among the 
men; the business runs at high speed but roughly, with much jarring; 
and the management has too little real knowledge of conditions to 
forecast the future most effectively. 

3. Leadership management. — Encouragement and the rousing of 
enthusiasm among employees is the contribution this type of manager 
makes to his business. His is an enterprise that requires extraordinary 
initiative; his men have to be keyed up to the fighting spirit — they 
need the " flaming torch" to lead them. Systematized routine is, 
therefore, left to handle problems where a solution has been found 
and a precedent established. The management devotes itself to 
"breaking trail" in every new and difficult path of the enterprise. 

4. Guiding management. — Some managers and directorates put 
their entire organization as a tool in the hands of their most brilliant 
executives, advising and aiding them to carry out for the profit of the 
concern whatever inspirations promise best or to exercise the particular 
genius of each. This is the type of business where the manager 
occupies a broad field and insists only on dividends rather than 
confining his business to a definite product or service. This policy 
is especially the recourse of a concern which has outgrown one line — 
the big business viewpoint, where the manager has perhaps realized 
his visions and depends on the inspirations of his men for further 
expansion. 

5. Balanced management. — Rockefeller's success is credited to the 
poise which he has always maintained in his corporation. In a 
business so balanced, neither men, money, nor service has undue 
emphasis; no one department or method is allowed to excel or over- 
top others, but every part constantly learns from other lines, con- 
stantly is kept up to the mark and in proportion with all others. 
This type of management combines the last two and rounds out 
the incompleteness of all. 



BASIC FEATURES OF ADMINISTRATION 787 

Study of the work of high executives indicates that they need 
a background of detail experience and that in emergencies they 
may have to handle the work of a department, but that they study 
themselves as frankly as their employees and use their resources 
to hire men who shall round out their own abilities. Skilled lawyers 
are constantly at the service of department heads in order to guard 
contracts; and technical men in a dozen different lines are kept 
available by various managers who recognize, as Funk has said, 
that their greatest value is in securing a co-ordinating expert service. 

Money management is an extreme of this type. There is in 
New York a body of men whose ability to manage money is drawing 
dividends from a score of middle western stores into which none of 
them has ever stepped. Of buying, of working with men, of plan- 
ning for expansion and choosing "good towns" for additional 
branches, they know nothing. This ability they have bought in 
the person of a trusty auditor and an experienced superintendent. 
They have limited the business to a cash basis, held down ad- 
ministrative problems to a minimum, and are enabled to control 
successfully merely by holding the strings of local and total reports, 
capital and surplus, purchases, sales and expense, profits and 
dividends. By comparative and graphic financial reports, they are 
shaping the future of a business in which capital is the big factor. 
Their method has been to reduce men and service to their lowest 
terms and shrewdly to pick out the essentials in the control of 
funds. 

An entirely different spirit is behind the policy of the manager 
who heads and inspires his men. He may have the other factors, 
finance, service, future plans, well in hand, but his biggest duty, 
as he sees it, is to lead his men — to teach them that he asks them 
to go nowhere except where he will go first. He has worked out a 
course which his enterprise is to take, and in order to keep close 
to it, he goes first. 

The manager who guides instead of leading and furnishing 
inspiration for his enterprise is making the best of a temperament 
judicial rather than executive. He hires department heads who 
are full of ideas but perhaps lack the ability to separate the good 
from the bad business propositions. His men furnish many ideas 
and inspirations; he guides their ambitions, challenges the visionary 
enterprise, and backs his workers in carrying out their plans. 



788 BUSINESS ADMINISTRATION 

At his best, he attracts to himself partners or subordinates who 
so round out one another's powers as to make for extraordinar}' 
efficiency. 

. The directorate of a great railroad is said invariably to follow 
this method in rilling the president's chair. Periodically the effective- 
ness of the system in all departments is discussed. The most recent 
executive has come up through the engineering or operating or 
selling department, and in line with his natural bias has brought 
that function to extraordinary efficiency. Another department far 
from his experience shows at low ebb. If an executive can be found 
in this weak department, he is elected to the presidency, and the 
business is thus made continually to race with itself. 

Management is not only the hardest problem in business, but 
the problem that comes nearest to the secret of failure and success. 
Up at the top of every business — at the apex of its pyramid of 
functions — sits some one to whom all lines, wires, and paths of 
communication lead; where focus problems, records, and plans; 
from whom radiate the spirit, the policies, and the initiatives which 
are to write in the future of the enterprise. 

3. SOME STATEMENTS ON THE ESSENTIALS OF 
ORGANIZATION 

[The parts of this selection should be read not as authoritative 
pronouncements in this field, but as a preparation for Selections 4 and 5. 
Read, asking yourself, "Are these really essentials ? Are they princi- 
ples? Are they anything more than a check list of some rules of 
action ?" (See pp. 756-59.)] 

a. "dimensions" of organization 1 

In spite of all the wide differences in organizations, we do, to 
use a mathematical term, know the "dimensions" of organization. 

We can conceive of no real organization, for instance, without a 
structure of some kind, without a definite plan. However work is 
apportioned, and by whatever means it is directed and carried out, 
we may be sure that the method must have definiteness. We may 
choose the wrong kind of men to do things, we may not plan to bring 
their work to them so that their time is most efficiently used, we may 

1 Taken by permission from Russell Robb, Lectures on Organization, pp. 2-34. 
(Privately printed, 19 10.) 



BASIC FEATURES OF ADMINISTRATION 789 

not use care that special skill is conserved; but if we have some 
plan that assigns definite duties, we have made a beginning in 
organization. 

We have, too, from our earlier organizations, the examples of 
the value of lines of authority. They add to definiteness. They 
provide the control and direction by subdividing for that purpose. 
As authority tapers down, it relieves from responsibility except in 
the fields for which men are fitted. It provides a definite court of 
appeal in case of difficulty, and thus saves endless disputes and 
arguments and consequent confusion. This tapering authority never 
leaves affairs without a head, and it assures the steady progress of 
the undertaking because it provides a properly trained supply of 
new men to fill vacated superior positions. • 

We know also the value of the factor of responsibility in organi- 
zation, the great incentive there is to careful and energetic work 
when praise and blame can be accurately placed, and we know that, 
as this responsibility is segregated, as men are relieved from divided 
responsibility, initiative increases, and we get the vigor of independent 
action and leave ability untrammeled. 

As undertakings become more complex, the factor of division of 
labor, of specialization, grows in importance. We use great care in 
choosing men for their different duties according to their fitness, 
and we increase this fitness and create special skill by narrowing 
duties so that all attention and study and practice are confined in 
one direction. In division of labor, advantage is taken of a natural 
tendency. Men do most readily what they can do best. It increases 
their interest and enthusiasm and efficiency. 

We know that a great factor in organization is "system," the 
mechanism of the whole. It transmits intellectual power, physical 
power, and skill to the main purpose. It touches all parts of the 
undertaking, for it is the introduction everywhere of order and 
method. It relieves those who direct from the details of execution, 
and it relieves the man with special skill from the duties for which 
he is less well fitted. It brings work to men in condition for the 
application of their particular function. It moves all in accustomed 
routine so that the waste involved in initial effort is avoided. It 
insures that important steps will not be forgotten. It makes use 
of mechanical aids to save human labor and thought. It arranges 
the processes so that the greatest good is secured from the use of 
the property devoted to the undertaking, and it introduces method 



790 BUSINESS ADMINISTRATION 

into the use, so that the property is not idle — so that time, the 
opportunity for accomplishment, is not wasted. 

With system and order, the value of discipline appears as a 
factor, for it holds all to the chosen system of working. It has to 
do with the rules and regulations necessary to carry out the system, 
with securing obedience to these rules, and with the training and 
instruction that assures full understanding. As a part of the main- 
taining of the system is the provision for watchfulness and super- 
vision to keep the movement in the right direction, and the provision 
for checks to insure against dishonesty, against errors in judgment, 
and errors from carelessness. 

We have another very important factor in organization, in 
accounting, records, and statistics, for these furnish the chart and 
the compass, the sounding-lead and the log. They are to show us 
where we are, where we have come from, where we are tending and 
how fast, and where the shoals lie, and they can tell us, too, how 
the craft is working. They must be largely depended upon to 
acquaint those who are directing undertakings with the progress and 
with the conditions, and this becomes more marked as organizations 
become larger and more complex, because it becomes increasingly 
difficult for those at the top to gather their knowledge from their 
own observation. 

An organization is much looked upon as a machine, as a cold- 
blooded product of synthesis, as an artificial sort of being that 
recognizes such realities as order, system, discipline, skill, and ability, 
but has no place anywhere for the "spirit" of anything. But if 
we are to look upon " organization " as something more than "system," 
if it is to be a sort of organism, we must recognize another factor, 
and that is esprit de corps. It induces enthusiastic and unselfish 
working together, with regard more to the whole result than im- 
mediately to one's own personal part in the achievement. It leads 
one to do his part well for the advancement of the whole. It leads 
one to see the advancement in his part because the whole is gaining 
in achievement and stability. If we have the military groups, it 
makes those groups support one another and act together as one; if 
we have the functional groups, it removes the friction, it covers the 
borderland, it helps to co-ordinate. It is not easy to define this 
spirit exactly. It is not mechanical and is not obtainable on com- 
mand, but it gives life and power to the organization. It will not 
exist without some understanding of the whole and without respect 



BASIC FEATURES OF ADMINISTRATION 791 

for the purpose and methods. It comes down from the top. It is 
a reflection of the feeling and the policy of those directing, a reflection 
of the respect of the superiors for their purpose, and of their earnest- 
ness in their work, and of their feeling toward those farther down 
who are joining in the work. 

Thus we know pretty definitely the factors that make organiza- 
tion. They are structure, lines of authority, responsibility, division 
of labor, system, discipline; accounting, records, and statistics; and 
esprit de corps, co-operation, "team play"; but when we attempt 
to determine the parts played by these factors, we find that their 
relative importance changes with purpose, conditions, and material. 
We begin to realize that there is an art of organizing that requires 
knowledge of aims, processes, men, and conditions, as well as of the 
principles of organization. 

b. "laws" of organization 1 

[Mr. Knoeppel distinguishes between principles of organization 
and laws of organization. He speaks of six principles of organization: 

1. Investigation — finding out what to do. 

2. Co-ordination — building the machine which will do it. 

3. Records — getting data to serve as basis of conclusions in carry- 
ing out what is to be done. 

4. Planning — arranging and co-ordinating all details so that the 
various steps can be rapidly and efficiently carried out. 

5. Standardization — carrying out the steps determined in a proper 
way. 

6. Incentives. 

His conception is that principles underlie laws, just as the con- 
stitution of the United States is, in his mind, an elaboration of the 
principle that all men are created free and equal; all laws passed must 
conform to this constitution. He lists the following twelve laws of 
organization.] 

First law, objective. — Working up a tentative plan with reference to 
the ultimate development desired. 

Second law, greatest complication. — The determination of the most 
complicated phases of the objective. 

Third law, concentration. — Placing in each division of a business 
all of the factors which effect the performance of its own function. 

1 Adapted by permission from an advertisement by C. E. Knoeppel and Com- 
pany, in Industrial Management for November, 1918. 



792 BUSINESS ADMINISTRATION 

Fourth law, individualism. — Placing in the hands of one man, most 
competent to handle the work, one or more functions of a business. 

Fifth law, mental capacity. — Dividing work in an organization, with 
reference to the knowledge and ability that will be required of a man 
in charge of one or more functions of a business. 

Sixth law, specialization. — Dividing work so that a man may 
operate in limited fields rather than cover many diversified fields, in 
order that a few things may be done well rather than a large number 
superficially. 

Seventh law, responsibility. — Holding a man responsible for the 
total proven results he secures in his division and not for the details 
or the methods that he uses in securing these results. 

Eighth law, permanency. — Training men to fill other positions than 
their own and providing for understudies so that changes in an 
organization may easily be made without disruption. 

Ninth law, cross fertilization. — Giving each pivotal man in an 
organization some opportunity during the year to know the methods 
of the departments his work influences mostly and of the departments 
which influence his work. 

Tenth law, relationship and instruction. — Providing a man with a 
clear-cut conception of the relationship existing between himself and 
those he is associated with, as well as with a written outline of duties, 
functions, responsibilities, results expected, and methods affecting 
his work. 

Eleventh law, personnel. — Analyzing the requirements of given 
positions and finding men whose qualifications match the given 
requirements. 

Twelfth law, staff and conferences. — Creating an analytical and 
advisory body in an organization to co-operate with the executive 
as well as a conference plan to make it difficult to determine where 
staff advice ends and line acceptance begins. 



See also pp. 820-22 for a criticism of the "Principles" of Taylor 
and of Emerson. 

C. MANAGEMENT "LAWS" 1 

i. The management of any business is solely responsible for all 
functions pertaining to management. 

1 Taken by permission from L. V. Estes, "Managing for Maximum Pro- 
duction," in Industrial Management, LVII (1919), 174. 



* 




BASIC FEATURES OF ADMINISTRATION 793 

2. The duties of every position, with the authority and responsi- 
bility pertaining to that position, must be determined and recorded. 

3. The qualifications for each position must be carefully deter- 
mined and definitely understood. 

4. Individuals possessing these qualifications — or the most of 
them — must be selected and trained for the positions. 

5. The function of preparation for what, how and when work is 
to be done must be separated from and must precede its execution. 

6. Investigation, analysis and standardization of conditions relat- 
ing to equipment, tools, methods, time, etc., must be carried out by 
the management. 

7. The benefits which result from elimination of losses and wastes 
must be shared in part with employees. 

8. The standards once determined must be recorded for use of 
the organization as a whole. 

9. The determination of a definite and fair day's task for each 
worker' — high and low — must be arranged for. 

10. This task must be assigned to the worker best qualified to 
perform it. 

11. Progress being made as to each task assigned must be reported 
by the execution section to the preparation section at regular intervals. 

12. The preparation section must record the progress being made 
and must know at all times the exact condition of every task for 
which they have orders. 

13. Workers must be trained to do the work by the best and 
easiest method, following the standard furnished them. 

14. Workers must be systematically trained in the performance 
of a number of tasks with the idea of increasing their ability and value. 

15. A reward, proportionate to the time taken as against the 
time allowed for each task, must be arranged for. 

16. Records which are comprehensive and reliable must be com- 
piled showing the results of each worker's efforts. 

17. The accumulative cost of every job, order, or task must be 
available — not necessarily in summary — as material, labor and 
expense are charged against the same. 

18. A special study should be made of the " human factor" in 
industry and the results of such study practically applied. 

19. With standards established, the exceptions either above or 
below the standard must be brought to attention of the executive in 
charge and commendation or constructive criticism made. 



794 BUSINESS ADMINISTRATION 

20. Continued study for further improvement and greater good 
must be carried on and the results of each study must be applied. 

D. ADMINISTRATION AS LEADERSHIP 1 

What is industry ? It is more than a division of labor, or a use 
of capital, or a production of goods, or a distribution of profits. 
It is an art of life: its inevitable product some sort of character. 
It is a daily relation of human beings, who are richly endowed with 
sensibilities, and who possess a pathetic capacity for indifference, 
shortsightedness, and brutality; and for enthusiasm, loyalty, and 
sacrifice. An industrial establishment should be a company of 
brothers banded together for mutual aid and the public good, and 
sustaining each other with sympathy in a process of self-expression. 
The most significant thing about industry is that it is a process of 
dealing with human nature. For men of talent it is chiefly an 
opportunity for leadership. 

Is there anything more natural and reasonable than the suggestion 
that we endeavor to discover what fine leadership has signified in the 
past; that we bring the wisdom of former times to bear upon the 
problems of the present ? But, it may be responded, economic leader- 
ship of the present sort is recent. It has little history; and what 
there is has been half forgotten, half concealed. This may be freely 
conceded. But there is a long and fascinating history of administra- 
tion, pertaining to the work of great military leaders, and statesmen, 
diplomats, reformers, the framers of ecclesiastical policy, and other 
prominent ones who have made for themselves a lasting mark in some 
field of the domain of organized action. 

But it may again be objected that these are different fields of 
leadership, and that the results of experience cannot be carried 
over from one to the other. It is true that there are differences 
in climate, and language, and country, and period. In war the 
use of artillery involves a different combination of the laws of physics 
and chemistry from that of the machine in industry. This would 
be important if we had in view courses in applied physical science. 
Likewise, it may be urged that political action is not restrained by 
the cost of production, in the sense that normal industry is; and that 

'Adapted by permission from E. D. Jones, "Education and Industrial Effi- 
ciency," in Papers and Proceedings of the Twenty-seventh Annual Meeting of the 
American Economic Association, V (1914), 215-26. 



BASIC FEATURES OF ADMINISTRATION 795 

its results cannot be promptly evaluated or liquidated, to facilitate 
a turn-over. This would be pertinent if we had in view courses in 
the administration of values; such as accounting, appraising, finan- 
cing, and investing. But these objections do not hold when we have 
in view the study of business administration, as the art of handling 
men. Here the subject-matter is human nature. The administrator 
in whatever sphere he works has to judge men, and understand how 
judiciously imposed responsibilities develop them, and how dangerous 
failure is to them. He has to safeguard against the same human 
defects of ill will, selfishness, and despondency; and he places reliance 
on the same factors of ambition, intelligence, and stability of 
character. 

The material of courses devoted to the human nature of joint 
action may be grouped, either with the object of bringing out most 
prominently the personality of individual leaders, or with the main 
purpose of elucidating the principles, one by one. Best of all, 
perhaps, is some compromise plan of taking up one principle at a 
time and elucidating it by a single, carefully studied, and fully 
presented episode from the life of a great administrator. 

Study of individual leaders. — The first arrangement, which aims 
to bring personality into view, has the advantage of interest and an 
atmosphere of reality. Individual example, which transcends every 
other influence upon conduct, is brought into play. 

Reviewing the lives of administrators, we may perceive, in such 
a man as Napoleon, an astonishing mastery of detail, coupled with 
weakness in demanding too rigid an obedience from his marshals, 
and in tolerating no advisors of independent mind at his court. 
Unshakable decision may be seen in Lincoln, while in the pages 
of Guicciardini we may read of the fatal irresolution of Clement 
the Seventh. 

For the effects of concentration upon principal aims we may 
review the life of Grant, which seems to have been framed on Bacon's 
advice, "Go through with that which is in hand, and interlace not 
business, but of necessity"; while Lord Brougham will provide the 
picture of scattered energies. On compromise and the middle course 
Sir Henry Savile can teach us; while Chatham will serve as an 
illustration of a statesman ready for extreme measures. In Robert 
E. Lee we may observe the function of religious faith in easing the 
mind of anxiety, after duty is performed. Efficiency in defeat may 
be illustrated by Wolsey's extraordinary fertility of invention, 



796 BUSINESS ADMINISTRATION 

Richelieu's power of making the most of all circumstance, Mazarin's 
cool objective temper, and Beaconsfield's courage. 

If we wish to study the talents which reveal themselves in speed 
of execution, there is the story of Sir Henry Vane's construction 
of the English navy under Cromwell, while the philosophy of 
judicious delays extends from Fabian to Joffrey. On the choice 
of men Cromwell gives us the grand test of moral force, saying, 
"I raised such men as had the fear of God before them, and made 
some conscience of what they did, and from that day forward, I 
must say to you, they were never beaten." 

If we would learn how proper limits may be set to effort, there 
is the history of Frederick the Great, who never overreached him- 
self, while, contrariwise, in the policy of Laud and Strafford, de- 
nominated by the word "thorough," and in the answering "root 
and branch" of the Parliamentary leaders, we may observe the stern 
virtue of avoiding half-measures overstepping practical limits. 

In Wellington's career we may trace, working together with 
immense capacity and devotion, the results of aloofness, and indis- 
criminate praise and blame, and finally, in his political life, intol- 
erance; while Julius Caesar, that predecessor whom he resembled 
in arms, challenges our admiration for his art of making common 
cause with his men, his astonishing power of searching out and 
rewarding those who deserved praise, and his leniency where the 
motives of his opponents were honorable. 

The study of principles. — The advantage of arranging material 
for the student, with the chief object of bringing out the principles 
of joint action, is that with such a plan the way is opened for the 
introduction of precepts from the wisdom literature, gems of advice 
from the maxim writers, the discussions of strategy, the rules of 
investigation which constitute the scientific method, together with 
facts from psychology, and postulates from ethics. By this arrange- 
ment of the subject, greater stress is put upon the reasoning involved. 
The student becomes accustomed to trace analogies between activi- 
ties of diverse kinds, and to formulate the general or pure prin- 
ciples common to those activities. While the results are not so vivid 
as in the other arrangement, they tend to be left in the student's 
mind in a more clear-cut and compact form, apt for ready use, 
somewhat as a creed or code of action. 

Of the many principles of administration which offer themselves 
for inculcation, but a word or two can be said. What may be 



BASIC FEATURES OF ADMINISTRATION 797 

called the mechanics of organization will involve the definition and 
distribution of authority and responsibility, including the neces- 
sary distinctions between planning and execution, and between 
general matters and details. It will aim at the adjustment of 
capacity to function, and the establishment of control through 
standards, sequences, and schedules, with individualized orders 
and records, tasks and rewards. These various steps combine to 
bring into existence a group of agencies, co-ordinated to mutual 
functioning, and taking the form of a system, including every 
individual and operation, and providing an avenue for the down- 
ward passage of ideas associated with initiative and the upward 
movement of facts connected with response. 

When attention is turned to questions of policy, the student 
will find his energies awakened by the fascinating variety and the 
sobering depth of significance of the subject. What are the various 
types of discipline which, in all degrees, from mere instinctive obedi- 
ence up to the most intelligent loyalty, have ever been relied upon 
to insure response to constituted authority? In what proportions 
are confidence in leadership and confidence in the co-operation of 
comrades blended in discipline? In co-ordinating various agencies, 
what is the applicability of the rule that only factors of analogous 
degrees of excellence should be united? "No man seweth a piece 
of new cloth on an old garment." And what are the limits of the 
counsel that the manner of a part must conform to the manner 
essential for the whole ? 

What, likewise, are the limits of the policy of preliminary prepa- 
ration, of which the German army has again given the world a 
striking illustration? It is, undoubtedly, a prime means of storing 
up a portion of the current energy of an organization for concen- 
trated delivery at a future time. But what of the saying of Pit- 
tacus, "Only power reveals the man"; an idea more explicitly 
expounded by Louis XIV to his son, when he said, "The higher the 
position, the more it has objects that cannot be seen or known until 
we occupy it." Again, there is a connection between preliminary 
preparation, with its tendency toward a fixed objective, and the 
disregard of small incidental successes. The value of the latter 
Sir Walter Raleigh, having in mind the uncertainties of fortune, 
emphasized. In yet another direction preliminary preparation 
bears upon the policy of seizing the initiative, for it has been well 
said that one can only plan specifically for what he himself initiates. 



798 BUSINESS ADMINISTRATION 

When we have as great a respect for human nature as for the 
nature of machines, and the value of products, we shall want 
the administrator to understand the character of attention and the 
significance of pleasure in work. If the time ever comes when what 
is now accepted as established in psychology, concerning the condi- 
tions under which human talents find efficient expression, becomes 
accepted in industry there will be a great revolution. The nature 
of many tasks will be changed, and the method of presenting tasks 
will be changed. [The discussion of matters affecting "the will to 
do" is here omitted. Consult chapter iii, pp. 153-192.] 

Time fails to speak of understudies, and of the arrangement of 
men in promotion chains, of cabinets and committees, of the means 
of giving to policy proper flexibility, of the function of compromise, 
of the many fine rules of diplomacy, and of the democratic theory 
that those pleasures are greatest which are shared. 

Literature. — The literature of administration, considering the 
sense in which administration is here used, is extensive. First of 
all, there is biography, infinite in amount, from ancient Plutarch to 
modern Bradford, writing of Lee, the American, and varying in quality 
from the stern stuff which came from under the heavy hand -of 
Carlyle, to the light workmanship of La Bruyere and Sainte-Beuve. 
For the study of benevolent tyrants (or the benevolent study of 
tyrants) there are Mommsen's chapters on Sulla and Julius Caesar. 
For the role of intuition as an aid to leadership, there is Monypenny's 
Disraeli. For tenacity of purpose there is Thayer's Cavour. It is 
well to seek out the great analyzers of human motives, such as Samuel 
Johnson, Bacon, Bulwer, Goethe, and Emerson. 

The philosophy of joint action may be found in the wisdom 
literature, extending from Proverbs to Bacon's Advancement of Learn- 
ing. There is much of it in such maxim writers as La Rochefoucauld 
and Chamfort, as well as in the aphoristic paragraphs of Goethe and 
Schopenhauer. Besides these, there are pertinent treatises by lesser 
men not to be overlooked, such as Sir Walter Raleigh's Cabinet Council, 
John Foster's Decision of Character, Lecky's Map of Life, and Sir 
Arthur Help's Essays. 

The early literature of political science, before modern constitu- 
tions so greatly hedged the executive about, is suggestive. And 
especially thought-provoking is the literature of the Renaissance, 
when the principles of politics were in such a formative and unrec- 
onciled state as the principles of business administration are now. 



BASIC FEATURES OF ADMINISTRATION 799 

And here there is particularly to mention the writings of Machiavelli. 
It is well to accompany the study of the products of this penetrating 
mind with the explanations of Morley, Villari, and Lord Acton. 

Military science deserves careful attention, for it is, at present, 
the most highly developed branch of administration, with the pos- 
sible exception of political science. It differs from the latter in 
that little sacrifice of efficiency has been tolerated for the sake of 
democratic distribution of power. The emphasis which this litera- 
ture places on the rugged virtues imparts to it something of the 
strength of soul of the classics. The great work in this field is that 
of General Karl von Clausewitz, the father of German strategy. 
It bears the simple title On War. The writings of the officers of 
the general staffs of Germany, England, and France constitute a 
reliable body of professional treatises, the general tone of which is 
surprisingly broad and philosophical. 

To offset the influence of studies in strategy, the student may 
turn to the literature of art, especially of that portion of it which 
considers art as a phase of self-expression, and as a source of pleasure 
in work. Here two names suggest themselves to us at once: John 
Ruskin and William Morris. 

It is, of course, unnecessary to make particular reference to the 
literature of personal efficiency, psychology, and scientific manage- 
ment. 

Conclusion. — The project, then, which I would urge upon teachers 
of economics and business administration, in our colleges and universi- 
ties, is to regard the business leader not merely as a ruler of matter 
and force, or as a calculator of value relations, but as a leader of his 
fellow-men. And this, not alone with reference to the leisure and 
wealth won from industry, but in the life of industry itself. 



See also p. 667. Entrepreneurship and Administrative Qualities. 



4. SOME TYPES OF ORGANIZATION 

[Although there is no single correct form of organization of uni- 
versal application, it is possible to make a survey of existing organi- 
zations and to see that they fall into certain rough types. One type 
shades off into another and a single business unit may have all types 
and many combinations of types in its various departments.] 



800 BUSINESS ADMINISTRATION 

A. LINE AND STAFF ORGANIZATION 1 

There are two great principles in organization commonly known 
as line and staff, or, to use the terms preferred by some industrial 
engineers, " military" and "functional." 

Line organization is essentially simple, mathematical subdivision. 
An army under a major-general is divided into brigades under 
brigadier-generals; each brigade is divided into regiments, under 
their colonels, and each regiment into battalions under lieutenant- 
colonels or majors; each battalion is divided into companies under 
captains; each company is again subdivided under its lieutenants, 
and so on down to the corporal with his squad. Promotion is step 
by step upward; the private may hope to be made a corporal, a 
sergeant, a lieutenant, a captain, a major, a colonel, a general. The 
lines of authority and responsibility run continuously through the 
whole body from top to bottom, as the veins of the leaf gather to 
the stalk, and many leaf-stalks to the twig, and many twigs to the 
branch, and many branches to the trunk; and veins and stalk and 
twig and branch and trunk have practically similar duties to perform 
in the life and growth of the tree. 

Staff organization is a division according to functions — division by 
which one military department does all the engineering work for the 
whole army, another supplies all clothing, or rations, etc. It is the 
division by which the roots absorb moisture and salts from the earth, 
the leaf cells make chlorophyll, the sap carries the products of these 
laboratories to the cell-building processes of the tree. Staff functions 
are co-ordinate and co-operative, but they do not stand to one another 
in any order of ascending and descending scale. The captain, simply 
as captain, ranks and commands the lieutenant; that is a line relation. 
But the engineer, as engineer, does not command the quarter-master; 
the quarter-master does not rank and command the surgeon; the 
leaf does not rank the root; that is a staff relation. On the other 
hand, the captain is primarily responsible only for his own company; 
each branch of the tree supports only its own twigs and each twig its 
own leaves. That, again, is line organization. The scope of the 
individual is limited in area, but unlimited in responsibility within 
that area. But the engineer builds a bridge for the entire army — 
general, colonels, captains, and privates; each root and leaf con- 
tributes its share to the life of the entire tree. That is staff organiza- 

1 Adapted by permission from C. B. Going, Principles of Industrial Engineer- 
ing, pp. 41-44. (McGraw-Hill Book Company, 191 1.) 



BASIC FEATURES OF ADMINISTRATION 80 1 

tion. The responsibility of the individual is unlimited in area, but 
limited to one function throughout that area. 

The functions of staff and line are, therefore, not antagonistic; 
they are not alternative and rival systems of organization, between 
which we may choose and say we will adopt this or that and refuse the 
other. Line organization is essential to discipline and essential to the 
continuous existence of the whole body. If the general retires there 
must be a colonel to succeed him; if the captain is killed in action, the 
lieutenant must take command of the company, or the men are scat- 
tered and lost. Staff organization is essential to efficiency, each 
branch of it in its own particular function. If the commissary fails 
and there is no food for the troops, the engineer cannot make up for 
the deficiency by vigorously building bridges. Each staff must have 
a line organization within itself for discipline and continuity; but 
every complete organization must embody the principles of both line 
and staff if we are to secure the best results, the staff supplying expert 
functional guidance, applied through the line's direct control. 

In manufacturing and industrial operations generally there is no 
lack of development of line organization, but there is too often a very 
meagre appreciation of the valuable results attainable by far-reaching 
applications of the staff principle. This is generally characteristic of 
modern industrial concerns, and it is here that we are likely to discover 
weakness when the attainment of high efficiency is desired. Under 
line organization, the foreman is supposed to decide every question 
for the men under his particular control — employment or discharge, 
wages, jobs, difficulties with materials, difficulties with tools, 
difficulties with processes, difficulties with other employees. If the 
question is too big for the foreman he goes to the superintendent, and 
if it i^ too much for the superintendent he puts it to the general 
manager, and it may finally go to the board of directors. The assump- 
tion under-lying is akin to the supposition that the corporal must be 
a better shot than the private, and the sergeant than the corporal, and 
the lieutenant than the sergeant, and so on up to the general in 
command. 

B. THE UNIT SYSTEM 1 

An interesting concrete example of modern scientific organiza- 
tion is furnished by the most extensive railway system in the world, 
the Union Pacific System-Southern Pacific Company, popularly 
known as the Harriman Lines. 

1 Adapted by permission from C. D. Hine, Modern Organization, pp. i4 - 33« 
(The Engineering Magazine Company, 1912.) 



802 BUSINESS ADMINISTRATION 

As a result of studies and recommendations made by the writer 
in 1908 under the direction of Mr. Kruttschnitt, there has been 
inaugurated a unit system of operating organization. The working 
outline of this organization can best be understood from the follow- 
ing standard forms of official circulars by which it is promulgated: 

Rail Company 

OFFICE OF GENERAL MANAGER 
Circular No 

iQi-. 

The following appointments of Assistant General Managers are an- 
nounced, effective 

■.., 191...: 

i.Mr 2. Mr 3. Mr 

4. Mr 5- Mr 6. Mr 

7. Mr 8. Mr 

Each of the above named officials continues charged with the responsi- 
bilities heretofore devolving upon him and in addition assumes such other 
duties as may from time to time be assigned. 

The titles, "General Superintendent," "Superintendent of Motive 
Power," "Chief Engineer," "Superintendent of Transportation," "General 
Store-keeper," "Superintendent of Telegraph," and "Superintendent of 
Dining Cars," will be retained by the present holders or their successors 
to such extent only as may be necessary for a proper compliance with laws 
and existing contracts. 

All persons under the jurisdiction of this office will address reports and 
communications, including replies, intended for the General Manager or 
for any Assistant General Manager, simply: "Assistant General Manager" 
(Company telegrams "A. G. M."), no name being used unless intended as 
personal or confidential, or to reach an official away from his headquarters. 

It is intended that an Assistant General Manager shall be in charge 
of this office during office hours. Each official transacts business in his 
own name and no person should sign the name or initials of another. 

All persons outside the jurisdiction of this office are requested to address 
communications, including replies, intended for the General Manager or 

for any Assistant General Manager, simply: "General Manager 

Co Bldg. 

," no name being used unless 



BASIC FEATURES OF ADMINISTRATION 803 

intended as personal or confidential or to reach an official away from his 
headquarters. 

General Manager 
Approved: 

Vice-President 
Division 



OFFICE OF SUPERINTENDENT 
Circular No 

191.. 

Effective this date, this Division discontinues among its officials the 
use of the titles, Master Mechanic, Division Engineer, Trainmaster, 
Traveling Engineer and Chief Dispatcher. 

The following named officials are designated: 

1. Mr. A. B Assistant Superintendent 

2. Mr. CD Assistant Superintendent 

3. Mr. E. F Assistant Superintendent 

4. Mr. G. H Assistant Superintendent 

5. Mr. I. K Assistant Superintendent 

6. Mr. L. M Assistant Superintendent 

They will be obeyed and respected accordingly. 

Each of the above named officials continues charged with the responsi- 
bilities heretofore devolving upon him, and in addition assumes such other 
duties as may from time to time be assigned. 

All of the above will be located in the same building with one con- 
solidated office file in common with the Superintendent. 

All reports and communications on the Company's business, originating 
on this division, intended for the Superintendent or for any Assistant 
Superintendent should be addressed simply "Assistant Superintendent" 
(telegrams "A. S."), no name being used unless the communication is in- 
tended to reach an official away from his headquarters, or to be personal 
rather than official, in which latter case it will be held unopened for the 
person addressed. It is intended that an Assistant Superintendent shall 
always be on duty in charge of the division headquarters offices during 
office hours. The designation of a particular Assistant Superintendent to 
handle specified classes of correspondence and telegrams is a matter con- 
cerning only this office. Each official transacts business in his own name, 
and no person should sign the name or initials of another. The principle 



804 BUSINESS ADMINISTRATION 

to guide subordinate officials and employees is to be governed by the 
latest instructions issued and received. 

Train orders will be given over the initials of the Train Dispatcher on 
duty, as will messages originated by him. 

Officials and other persons above and outside the jurisdiction of this 
division are requested to address official communications, intended for 
the Superintendent or for any Assistant Superintendent, simply: "Super- 
intendent Division " 

(telegrams "Supt."), without using the name of the Superintendent except 
for personal matter. 



Approved: Superintendent 

General Manager 

Any study of the underlying principles of the unit system must 
take into account a most distinctive characteristic of a railway, 
namely, its physical extent. The head of a manufacturing plant, 
of a bank, or of a department store, could in a few hours' time per- 
sonally see every employee of the establishment and observe most 
of the constituent activities. After a railway once begins business 
no division superintendent even can hope ever to see all of his trains 
assembled or all of his employees congregated in one place. So few can 
come to him that he must go to them. This results in an anomalous 
condition. While the superintendent or other official is on the road, the 
routine business at headquarters must be transacted or the company's 
interests will suffer. Under a feudal conception that because the super- 
intendent is an official he can be in at least two places at the same time, 
it is the custom on most railways to have the chief clerk at head- 
quarters sign the name of the absent superintendent to official com- 
munications. When the superintendent is absent from headquarters 
the chief clerk perforce handles communications to such subordinate 
officials as the master mechanic, the division engineer, the train- 
master, etc., officers all receiving larger salaries than the untitled 
chief clerk and presumably men of wider experience and better 
qualifications than he. Sooner or later every chief clerk oversteps 
the tenuous line and in the name of routine business is consciously 
or unconsciously restricting the authority or activity of those who 
are in reality his official superiors. 

The unit system of organization eliminates "government by 
chief clerks" by insisting that no person shall sign the name or initials 
of another. Since the business must go on and no person may sign 
for another, it follows that a sufficient number of duly qualified 



BASIC FEATURES OF ADMINISTRATION 805 

officers must be appointed By giving all the uniform title of assist- 
ant this or that, every one is available foi prompt comprehensive 
action should occasion so require. 

This requirement is worked out in practice by having normally 
at headquarters the senior assistant, who is in effect, though not 
in name, the chief of staff. At the headquarters of an operating 
division he is, as stated, the man who was previously to reorganiza- 
tion the assistant superintendent of the division. The former 
chief train dispatcher of the division is usually started near the 
foot of the list of assistants. His duties are unchanged and he re- 
mains at headquarters handling such endless details of operation as 
directing the work of train dispatchers and telegraph and telephone 
operators, assigning locomotives, distributing cars, manning trains; 
in fact, he is the incarnation of detailed administrative activity. 
At a normal division headquarters, then, there are two assistant 
superintendents on duty, one as chief of staff, the other as chief 
dispatcher, one the senior and the other a junior, one a distinct 
head of the office, the other in effect his senior's aide. Both assist- 
ants being clothed with authority, either can act on any problem 
that may suddenly develop in an unforeseen absence of the other. 
On divisions of very light traffic one assistant at headquarters may be 
sufficient. 

No distinct grade of senior or chief assistant is created in any 
unit. Normally number one, the real senior, is "on the lid," as it 
is termed, at headquarters, and is excused from outside road duties. 
In case of his prolonged absence, the head of the unit, the general 
manager, or the superintendent, as the case may be, designates the 
most available of the other assistants to remain at headquarters 
and sit on the lid. An unwritten law here operates to make such 
designated assistant the chief or senior of all the others for the time 
being. No formal announcement of such designation is necessary. 
A railroad does not change its physical location frequently, as does 
a fleet or an army, and the chance of confusion of relative rank is 
remote. Advantage is taken of this elastic feature of assignment on 
some divisions to rotate various assistants through the senior chair 
in order to gain the splendid comprehensive training for higher 
positions which the position affords. Assistants thus favored are 
unanimous in expressions of appreciation for the valuable knowledge 
and experience acquired. 

Each assistant when at headquarters signs communications to 
subordinates in that branch of work in which he is technically 



806 BUSINESS ADMINISTRATION 

expert and for which he is held responsible by the head of the unit. 
For example, the maintenance assistant superintendent issues in- 
structions to his roadmasters or track supervisors; the mechanical 
assistant to his engine-house foreman or car-repair foreman; the 
transportation assistant to his yardmasters, etc., etc. Each, however, 
after signing is supposed to send his communication over the desk 
of the senior assistant, both for the latter's information and for 
review and co-ordination. This has proved a valuable check upon 
official caprice in issuing unnecessary instructions. More energy is 
now expended in seeing that instructions already issued are carried 
out, and less in promulgating those that in themselves may uncon- 
sciously confess a laxity in previous enforcement. It is obvious 
that under this system the senior assistant has a most comprehensive 
knowledge of the affairs of the unit. The head and the other assist- 
ants come and go between the road and the office. The senior 
assistant has a practical grasp of operation that enables him to aid 
the head of the unit in balancing its component elements, in minimizing 
departmental jealousies, and in engendering a spirit of team work. 
When the head of the unit or any assistant is on the road, he is 
represented at headquarters not by a chief clerk but by a chief 
of staff, the senior assistant, who transacts business in his own name. 
This somewhat elaborate covering of headquarters results, as intended, 
in more traveling and in better outside supervision by the other 
assistants. Their increased availability for outside work is the strong- 
est of the several strong features of the system. 

C. THE COMMITTEE SYSTEM 1 

Committees in general. — Factory problems are nearly always 
many sided and hence difficult of solution by any one man, especially 
where, under staff organization, he is charged with and capable of 
handling only one phase of the work. Furthermore, as before stated, 
when several men are on the same authoritative level there must 
always be some definite means provided so that they can harmonize 
their efforts. There is no way by which these ends can be served 
comparable with a good committee system. There are several 
inherent advantages in a good committee. First, it is impersonal in 
its action, and its verdict, like that of any jury, is usually based 
on the facts presented. The very atmosphere of a committee tends 
to compel all of its members to lay aside pettiness and personal 
prejudice and to act in accordance with the merits of the case. The 

1 Taken by permission from D. S. Kimball, Principles of Industrial Organiza- 
tion, pp. 88-91. (McGraw-Hill Book Company, 1913.) 



BASIC FEATURES OF ADMINISTRATION 807 

foreman who would, over the telephone, blame a fellow-foreman for 
a delay will hesitate to do so in his presence or in that of his superior 
officers. The decisions of a committee are, therefore, likely to be 
more accurate than those of an individual because of the greater 
accuracy of its basic information. A misstatement on the part of a 
member is not likely to go unchallenged. 

Secondly, committee meetings tend to promote a better un- 
derstanding between men of the same authoritative level and 
of different levels. Distrust and jealousy of each other are 
rapidly eliminated as men know one another better and see the 
good side of each other's nature. There is something likable in 
all men if one can succeed in discovering it, and this can be done 
only by bringing them into close personal contact with common 
problems to be solved, not by wrangling and fault-finding, but by 
an earnest endeavor to find the very best solution. Thirdly, the 
committee method tends to awaken interest in the work and to draw 
out the best efforts of all of its members, and tends generally toward 
a better esprit de corps. 

Committees are always of an advisory character. They can- 
not replace strong personality but they can be used effectively 
to assist a strong executive in finding out what is actually going 
on in the factory, in deciding what should be done, and in enlist- 
ing the good will of those under him. The best and most natural 
basis of committee work is a report on the matter under discussion, 
and reports are greatly enhanced in value when discussed by an 
intelligent and representative committee. There may be many 
kinds of committees and for many purposes, but only a few typical 
ones will be discussed here. In general, committees should not be 
too large or too small. If too large they become very unwieldy, and 
if too small they may not secure a broad representation. A com- 
mittee of six members is usually large enough. 

The manufacturing committee. — Referring to Figure 4 [omitted] it 
is apparent that no one of the four vice-presidents [chief salesman, 
chief engineer, factory manager, and treasurer] would be able, in 
general, to advise the general manager on the entire manufacturing 
policy of the works. But if these four men are collected into a 
manufacturing committee, each of the four important divisions of 
the works is represented by an expert. The general manager would 
be the natural chairman and such a committee, through him, can 
direct the manufacturing policy of the plant with great intelligence. 
The matters that naturally come before this committee are: 



8o8 



BUSINESS ADMINISTRATION 



i. The general manufacturing policy of the plant, the char- 
acter and sizes of the articles to be made. 

2. The approval of all orders of extraordinary character and 
the approval of orders for stock, if goods are manufactured for 
stock. The approval of all extraordinary manufacturing expendi- 
tures and recommendations for economies. 

The reports that would naturally be laid before it would, there- 
fore, include the profit and loss statement, stock and sales reports, 
and similar general statements. 

[The original continues with a discussion of various committees. 
That discussion is here omitted and the reader is referred to pages 
236-239 for other examples of committee organization.] 

D. THE HUMAN ANALOGY 1 

The Master Designer of the universe brought into being the 
highest development of his handicraft, the human body — the most 
perfect type of organization. So perfect was this organization in its 
inception, so flawless in its functioning under the severest conditions, 
that not in the slightest detail, has a change been made since its 
organization. We little realize what an efficiently managed and 
complicated manufacturing plant we possess built upon that frame- 

BUoINESS ORGANIZATION MODELED FROM HUMAN ORGANISM 



Data from all 
Available Sources 




Senses 



Line 

Organization 




Brain 



Department Managers 
Superintendents and Foreman 



Clerks, Assistant Managers 
Assistant Foreman- Workmen 



Voluntary 
Organism 



Involuntary 
Organism 



1 Adapted by permission from an advertisement by C. E. Knoeppel and 
Company in Industrial Management for November, 1918. See also article by 
J. H. Van Deventer in Industrial Management, LX (1920), 260-64. 



BASIC FEATURES OF ADMINISTRATION 



809 



v 



Office of the 
General Manager 

(Cerebrum) 



Chief of 
Action Dep't 

(Cerebellum) 



Department of 
Planned Functions 



E]0 



t f! l! 



V 



t 



V 



t 



V 



t If 



QCDCDCDCDCDCDC 



Chief of 
Routine Dep't 

/ Medulla \ 
lOblongata) 



v 

F 



Department of 
Routine Functions 



E 



V 



V 



V 



V 



A — Action-department managers. 

B — Information experts assisting the above. 

C — Incoming information (sensations). 

D — Outgoing orders to the working force (muscles). 

E — Routine-department managers. 

F — Outgoing orders to the working force (involuntary muscles). 

Notice that the action-department managers are provided with assistants to 
relieve the arduous and varied efforts they are called upon to make, whereas the 
routine department managers, not being under the strain of original work, are 
required to perform their duties without assistance. Compare this with the 
organization scheme of your plant. 

work of bones; and in a still lesser degree do we realize how the 
complex system of the body is so admirably controlled under the 
scientific management of the brain and nervous system. A better 
example of organized control cannot be found anywhere in the whole 
wide world; its component parts are of a finer kind of design than 
we will ever approximate, and the functions and their relations are 
co-ordinated more smoothly than we will ever be able to arrange 
human relations. Every function of the body is a skilled function, 
doing something it has been fitted to do. 

First, we have the cerebrum, or office of the general manager. 
As befits the dignity of its position its location is at the very top. 
It is the center of intelligence, thought, reason, judgment. Directly 



810 BUSINESS ADMINISTRATION 

beneath it is the cerebellum, or office of the action manager. Con- 
trolling as it does the voluntary muscles of the body, it is the respon- 
sible party for all of our physical movements. Directly underneath 
the cerebellum is the medulla, in which is located the chief of routine 
affairs, a very important official as we shall later find out. These 
three constitute the main officers of the company, but each has many 
subordinates. The spinal column constitutes the connecting link 
of authority between these various under officials. By it the reflex 
centers, or department managers, are kept in touch with their imme- 
diate head, the cerebellum. Also, through its agency, the routine 
department managers, otherwise called the sympathetic ganglia, 
answer to the commands of their superior, the medulla oblongata. 

Each of the action department managers has two subordinate 
officials working under his orders, one of which is the information 
expert who records and collects information in the way of sensations; 
the other is the gang boss or action department foreman, who carries 
out the orders of his department manager which are based on the 
information received from the information expert. Physiologists call 
the information expert and the gang boss by different names — the 
sensory and the motor nerves. Their functions are kept quite as 
distinct as those of the functional foremen in what is known as 
scientific management. In addition to these, there are a number of 
very highly specialized and high-priced officials who look after 
extremely important divisions of work. As a group they are called 
the cranial nerves, and among them are the heads of the optical, 
auditory, and the other sensory departments. 

We see from the above that the type of management of this 
model plant is strictly a line and staff organization, carried out to a 
finer degree than any of us are accustomed to. There is evidently 
no sparing of specialists where they are needed, and the duty strongly 
impressed on each of these is to take full charge of his job and leave 
the general manager free to think of the big thoughts. 

E. THE "TWO-PLANE" PLAN OF ORGANIZATION 1 

This form of organization — precisely as the human brain does the 
thinking and the nervous system takes care of routine — separates 
creative from routine functions and provides a duplex organization, 
the creative part of which does the orginal thinking. It has time to 

1 Adapted by permission from J. H. Van Deventer, "How to Develop Execu- 
tive Ability," Industrial Management, LX (1920), 260-64. 



BASIC FEATURES OF ADMINISTRATION 8ll 

do it because it is free from routine. The creative part of this organi- 
zation continually breaks new ground, and its findings and discoveries, 
when approved and adopted, are passed over to the corresponding 
routine plane. 

The chief value of the 'two-plane" organization plan lies in 
compelling an analysis of the business from a new point of view which 
leads to the encouragement of proper routine with the liberation of 
detail from the creative minds. Routine keeps the ship of industry 
afloat, but creative thought is the motive power that gives it headway. 
The development of both of these two distinctively different classes 
of activity is essential to the attainment of the fullest degree of success. 

The creative plane in any organization cannot be properly 
developed without a corresponding development of the routine plane. 
Too much steam and too little flywheel is a fatal combination; much 
less safe than the reverse condition. Perfect the routine first, for it 
is the backbone of the business. This is the plane for the substantial 
level-headed fellows gifted with persistency and for temperaments 
lacking imagination and happiest under the cross fire of intense 
activity. 

For the creative plane the qualifications are: a broad knowledge 
of the policy of the organization as a whole; an intimate knowledge 
of the particular requirements of the department or division; unlim- 
ited enthusiasm and the gift of imagination. [The author gives an 
excellent diagram of an organization planned on the " two-plane" 
basis. The following will serve as samples — they are only samples — 
of the entire scheme.] 

president's position 

Creative plane. — President formulates company policies through 
consultation with his staff; critically analyzes reports from all divi- 
sions prepared by his assistants; consciously directs the development 
of enthusiasm and efficiency of all division heads; interprets through 
his personality, actions, and contact with employees the spirit of the 
organization; makes critical study of the weak points in the organi- 
zation ?md initiates steps to strengthen them. 

Routine plane. — Assistant to president receives routine reports 
from every division and prepares final digest of these for president's 
attention; maintains schedule of appointments, disposing of unneces- 
sary interviews personally or by delegation; maintains the executive 
correspondence and data files; acts as secretary at staff conferences 



812 BUSINESS ADMINISTRATION 

and maintains follow-up of decisions therein arrived at; prepares 
bulk of correspondence for president's signature, either on own initia- 
tive or under brief instructions. 

SALES POSITION 

Creative plane. — Vice-president in charge of sales studies the 
possibilities of new markets; instigates sales campaigns; investi- 
gates serious difficulties of sales resistance; interprets further possi- 
bilities of product through the analysis of performance data; creates 
new sales arguments; develops the sales force and establishes and 
develops the dealer and distribution organization. 

Routine plane. — Assistant to vice-president tabulates daily sales 
report; prepares sales analyses and records of increase; maintains 
follow-up; supervises sales correspondence and general routine of 
business with dealer and distributor; supervises circulation of form 
letters and the preparation and maintenance of mailing lists; respon- 
sible for the proper maintenance of all routine in connection with the 
sales organization. 

FINANCIAL POSITION 

Creative plane. — Vice-president and treasurer establishes and 
modifies general financial policy with approval of the president and 
board of directors; supervises bond and stock issues, loans, invest- 
ments; makes critical study of costs and profits. 

Routine plane. — Assistant to vice-president and treasurer analyzes 
market conditions and trend of business; prepares graphical and 
statistical financial reports; compiles credit data; operates account- 
ing department; manages cashier and paymaster's offices; checks 
purchases; maintains cash accounts; compiles regular daily reports 
for president and treasurer; makes final tabulation of cost data 
based on factory costs. 



For the Taylor plan, frequently called functional organization, 
See p. 615. Scientific Management in Production. 

p. 624. Control of Manufacture under the Taylor System. 

p. 354. An Organization of the Sales Department. 



BASIC FEATURES OF ADMINISTRATION 813 

5. "REGULATIVE PRINCIPLES' ' OF THE ART OF 
MANAGEMENT 1 

No apology is necessary for an attempt to formulate some definite 
basis on which to build a truly scientific art of management. The 
regulative principles of the art of management are three: 

1. The systematic use of experience. 

2. The economic control of effort. 

3. The promotion of personal effectiveness. 

If these three principles are correctly stated, then the scientific 
basis of management is capable of being derived from their develop- 
ment and extension. 

1. The first principle: The systematic use of experience. — Experi- 
ence is the knowledge of past attainment. It includes a knowledge 
of what has been done, and also how it has been done. It is in- 
separably associated with standards of performance, that is, with 
the ideas of quantity and quality in relation to any particular method 
of doing something. 

The great instrument of experience, which makes progress pos- 
sible, is "comparison." By systematic use of experience is meant 
the careful analysis of what is about to be attempted and its reference 
to existing records and standards of performance. In many cases it 
may be found that gaps in existing experience occur. In such cases 
the experimental determination of data may be undertaken, so that 
we have a full covering of the ground, either by the experience of 
others or from our own experimental determinations. 

In setting out to examine any work it is necessary to ask: 

What experience, in the form of methods and standards of per- 
formance, already exist? 

Is our performance equal to these standards? 

Is it so far behind that it will pay to expend time, energy, and 
money to approximate more nearly? 

Are existing standards based upon the use of the most advanced 
practices and methods of the present day, or is there reason to sup- 
pose that experimental redetermination of such standards would 
show a new maximum of effectiveness? 

In the experimental accumulation of experience the economic 
value of such experience must be kept in view. If the inquiry 

1 Adapted by permission from A. H. Church and L. P. Alford, "The Principles 
of Management," in American Machinist, XXXVI (191 2), 857-61; and A. H. 
Church, The Science and Practice of Management, p. in. (The Engineering 
Magazine Company, 19 14.) 



814 BUSINESS ADMINISTRATION 

relates to operations which will be repeated many times, as in the 
processes of manufacturing staple articles, detailed experimental 
investigation may be worth while. In other cases it is well to con- 
sider the total economic value involved, the possible maximum that 
could be saved, and the probable cost of the investigation. 

Experience tends to pass into traditional practice. That is its 
most useful form. Every kind of experience must pass into the mind 
of a man before it can be utilized practically; hence it follows that 
new experience should be crystallized into new traditions of practice 
as fast as possible. 

In the shop men are not always running to textbooks to see if 
they are right — at least the competent practical man is not. Even 
if it be conceded that practice in the present day is all wrong and 
needs to undergo exhaustive study and reform, this only means that 
we are engaged in developing new standards of practice, which will 
take the place of the old traditional practice, and will in turn form a 
new tradition. The proper place for these new traditions or standards 
of practice is precisely the same place as where the old ones were 
kept, namely, in the minds and memories of those who do and are 
responsible for doing the work. Further, it is impossible to record 
it all — something must remain with the man. 

New experience can be transmitted in one of two ways, either in 
minute instructions of which individual workers do not perceive the 
drift, or as a connected body of new practice. The latter form is 
the better, though it demands educational efforts somewhat apart 
from ordinary shop routine. Not until the new experience has be- 
come fixed as a habit will its full value be realized. 

2. The second principle: The economic control of effort. — Effort is 
experience in action. Before we can do we must think, that is, dig 
into our stores of experience relative to the proposed undertaking. 
Having taken thought, we proceed to action. 

In order to produce organized action it is necessary to control 
effort in various ways. These are: "division," "co-ordination," 
"conservation," and — in industrial undertakings — "remuneration." 
Most of the discussions about management are, in fact, discussions 
about the various methods and degrees of controlling effort and 
fixing its reward. 

It is possible to manipulate effort so as to produce an organization 
of the utmost flexibility or, on the other hand, one of hard and fast 
rigidity. In certain special cases rigid organization is permissible, 



BASIC FEATURES OF ADMINISTRATION 815 

but in general manufacturing, flexibility is really essential. By flexi- 
bility is meant the power of self-adjustment to unforeseen events. 

Division of effort. — Division of effort is largely controlled by 
design. This is the principle nf the unit part or component. Modern 
practice regards the complete machine or device as an aggregation 
of parts, and it is one test of efficiency when these parts come to- 
gether in perfect shape, without requiring readjustment to correct 
faults of workmanship in their progress through the shops. 

"Division of effort" is a universal principle throughout all the 
activities of manufacturing. Starting with design which controls the 
maximum limit of operative division, it is usually found desirable 
that operation should also be divided into processes. These usually 
correspond to machines. To some extent they are controlled by 
"settings." 

It is important to have as few settings as possible, as nothing 
else is so wasteful of time. One setting in a jig is, therefore, made to 
subserve several processes in some cases. In other cases one setting 
in a machine holds the work for a series of consecutive processes, 
which may be of a different character, as turning, boring, threading, 
etc., at one setting. 

From this it is apparent that there are limiting considerations to 
the division of effort. It is not merely a question of dividing to the 
bitter end. There are cases in which it is better to combine opera- 
tions and, in fact, execute them simultaneously. 

This is worthy of attention, because it will be found that in all the 
principles of management that have yet been ascertained the limiting 
conditions are not yet formulated. Every such principle has limita- 
tions and it is neither necessary nor advisable to push it to its far- 
thest possible development. For example, the provision of jigs for 
repetition work and where it is required to secure dimensional rela- 
tions of exactness, as in drilling holes, though a very old idea, has 
not yet been definitely settled as regards its limiting conditions, and 
there are frequent cases in which doubt exists whether the expenditure 
for such jigs was, after all, a wise one. 

By many of the enthusiastic advocates of particular systems of 
management, the existence of limiting conditions is hardly suspected, 
consequently they ride their favorite hobby to exhaustion, till many 
useful ideas become discredited in the eyes of practical men. It is 
not enough to know that a principle can be applied — it is even more 
important to know when not to apply it. 



8 1-6 BUSINESS ADMINISTRATION 

The third great field of division of effort is in connection with 
administration or control. This is the great battleground of the 
systems at the present moment. Thus, to mention only two, we 
have Taylor's functional system and Emerson's line-and-staff plan. 
Also we have the old method of simple, delegated authority in hier- 
archical form, from president to manager, manager to superintendent, 
superintendent to foreman and so on. Which is the best ? 

Obviously, the question cannot be answered until we have 
ascertained what principles have been applied in each case to produce 
these forms of organization, and what are the limiting conditions 
that control, or should control, them. The subject is a tempting 
one, but it must be postponed until, at least, the remaining modes 
of manipulating effort have received attention. 

Co-ordination of effort. — The co-ordination of effort is an insep- 
arable counterpart of the division of effort. By co-ordination is 
meant the prearrangement of a number of separate efforts in such 
a manner as to produce a definite end. A still more perfect co- 
ordination is attempted when this end is to be attained in a definite 
time. Co-ordination in design means that unit parts are so designed 
that ultimately they fit together. Co-ordination in division of 
operations means that when all the operations are performed, certain 
definite shape and dimension are given to the part. Both kinds of 
co-ordination are part of everyday practice, and are generally realized 
with a good percentage of success. Co-ordination of operations in 
regard to time is, however, a more advanced matter, and in many 
plants is still in a very unsatisfactory stage. 

The co-ordination of administrative effort is the most complex 
and debatable problem of all. The moment we begin to divide 
effort, we must also begin to provide for its co-ordination. Adminis- 
trative effort does not possess the same tangibility or definiteness 
as do design and operation, because it is wholly made up of spheres 
of influence of personal authority. 

Therefore, in proportion as we divide administrative effort 
(executive functions), its co-ordination becomes more difficult. The 
more we subdivide authority, the less flexible becomes our organi- 
zation. 

There is a point midway between simple delegation of all author- 
ity and the method of analyzing it into component functions and 
handing out each of these functions to separate many that is probably 
the most effective way of dividing administrative effort. The 



BASIC FEATURES OF ADMINISTRATION 817 

limiting conditions to excessive functionalism can, however, already 
be seen as shown above. 

Conservation of effort. — Effort requires not only to be divided and 
co-ordinated but also conserved. The conservation of effort means 
proceeding along the line of least effort to attain a given end. 

Remuneration of effort. — The remuneration of effort has very 
little relation to any of the other manipulations of effort, for these 
would still be necessary if no remuneration was offered at all. But 
as no plants are manned with staffs who work for the mere pleasure 
of working or "for their health," the question of remuneration is 
very important. 

3. The third principle: The promotion of personal effectiveness. — 
The ideal plant is one which has good equipment, good methods, and 
good men. It is a comparatively modern discovery that the welfare 
of the plant and the welfare of its employees are closely connected. 
By welfare we do not mean, however, the semi-philanthropic ideals 
which result in model villages and other "social welfare" experi- 
ments, but only the application of the principle of the "square deal" 
to working relations during working hours. 

The Latin poet defined happiness as the possession of a healthy 
mind in a healthy body. The definition is perhaps a somewhat 
pagan one, but eminently practical at that. If the plant cannot 
secure these gifts for its people, it can at least see that all con- 
ditions shall be favorable, or, at any rate, that they shall meet 
few conditions in their working hours inimical to either health of 
mind or body. 

Remuneration stands, of course, at the head of these conditions, 
but it is not the only one, nor does it stand unconnected with others. 
In spite of Thomas Carlyle, the "cash nexus" is far from being the 
only link between employer and employee, even today — that is, if 
he is wise. In every considerable organization esprit de corps is 
always latent, and if it remains latent or is turned into latent, or 
open, discontent it is a mark of the very worst management. 

Every human being desires to feel that his work is important. 
Even the criminal frequently has pride in his criminality. With 
certain kinds of creative work the mere doing of it is associated 
with a high degree of personal satisfaction, because the author or 
the artist is only following out the law of his being. 

In proportion to the number of elements in a problem the 
difficulty of its solution augments. Personal effectiveness and its 



818 BUSINESS ADMINISTRATION 

favoring conditions contain innumerable elements, many of which 
probably defy human analysis. Therefore we must proceed modestly 
and cautiously on the path of discovery, and far from attempting 
to lay down the laws, it will be well if we succeed in observing 
the interplay of a few of the most obvious conditions of personal 
effectiveness. 

To begin with, we must assume physical health. From this it 
is but a step to recognizing that shop conditions must be such that 
health can be conserved. This point is beginning to be understood, 
and modern shops avoid the dirt, darkness, and obscurity, and 
extremes of cold and heat that a generation ago were accepted as 
good business. We have progressed so far as to be aware that, on 
the contrary, they are very bad business. Closely allied is the 
question of affording facilities for personal cleanliness, dining halls 
for the midday meal, and other auxiliaries to physical needs of shop 
existence. The most widespread application of this third principle 
today is in the safeguarding of machines and operations. 

The real center of the problem is, however, not on the physical 
plane, or only incidentally so. The psychological elements are not 
so obvious, but they are much more important. As in most of the 
analyses we have made, it is observable that these two groups are 
nearly independent of one another; that is, their efficiency can .vary 
independently. We may have very bad physical conditions and yet 
a fine esprit de corps or, on the other hand, a finely arranged modern 
shop and a sullen, discontented population within its walls. 

The independence is not quite complete, since bad physical con- 
ditions must affect the psychological side to some extent, even 
though not observable. But, on the other hand, the finest psycho- 
logical adjustment will not make a dark shop light, or a cold shop 
warm. 

Some of the conditions of personal effectiveness are these: The 
individual must feel leadership; have adequate encouragement and 
reward; be physically fit and under good physical conditions; and 
receive a definite allotment of responsibility. 

These conditions apply not only to the operative force but to 
all grades of employees. In fact, some of them apply with greater 
urgency to the man " higher up" than to the actual worker. It is 
evident that they have, or should have, a considerable and control- 
ling influence on the arrangements made for the division and co- 
ordination of administrative effort. 



BASIC FEATURES OF ADMINISTRATION 819 

A good deal has been made by some of the modern schools of 
management doctrine of the claim that this or that system creates 
a fine spirit of co-operation between the plant and its men, but for 
the most part these claims are merely statements of a desirable end 
to be attained, and not indications of a method by which it can be 
attained. 

The truth is, of course, that no single element of a system, or 
even a combination of half a dozen such elements, as methods of 
payment, functionalized authority, etc., more than touch the fringe 
of the question. Highly organized systems may coexist with fine 
esprit de corps, but the latter is not dependent on any form of system 
or organization. 

Of all the conditions controlling a fine working atmosphere, 
leadership probably plays the most important part. In warfare men 
prefer to serve under the general who wins battles, though that 
entails hardships without number and toil without end. In in- 
dustrialism, mechanism is a mighty unimportant thing compared with 
an "old man" who is a born leader of men. 

The weakness of one prominent school of management doctrine 
is that it pretends that it has superseded leadership by substituting 
therefor elaborate mechanism. Such a contention betrays a complete 
misapprehension of how men are constituted, and of what the true 
functions of elaborate mechanism really are. All such mechanism is 
but a collection of mechanical tentacles or feelers, to enable the con- 
trolling mind and spirit of the management to be in several places 
at once. If the personality behind these tentacles is a feeble one, 
the mechanism will not supplement its deficiencies in the slightest 
degree. 

This is not to say that such mechanism is useless; on the contrary, 
it is essential in the large-scale operations of modern industry, and 
it is, therefore, highly important that it should be carefully arranged 
and well balanced, but it is in itself inert and lifeless — a purely passive 
channel through which the capacities of leadership may exert them- 
selves. 

In other words, organization and system are something forced 
on us by the necessities of the case, and that something has no virtue 
either in itself, or in any possible combination of its components. 
It does not add one single cubit to the stature of leadership, though, 
on the other hand, its absence or its bad arrangement may detract 
considerably from the full realization of what would otherwise be 
possible to leadership. 



820 BUSINESS ADMINISTRATION 

It is more than probable that types of organization depend for 
their success on their harmony with the particular type of leadership 
that is endeavoring to make use of them. This would explain why 
systems are successful in one case and fall down in what appears a 
similar case. 

At the present stage of the analysis of management we can do 
no more than make a note of this. It must always be remembered, 
however, that organization is a tool, and that it is our duty to fit 
it to the leader and not try to compress the leader to fit the system. 
Understanding of the limiting conditions of this part of the problem 
must be left to future progress to compass. 

Recapitulation: 

i. Experience must be systematically accumulated, standardized, 
and applied. 

2. Effort must be economically regulated: 

a) It must be divided. 

b) It must be co-ordinated. 

c) It must be conserved. 

d) It must be remunerated. 

3. Personal effectiveness must be promoted: 

a) Good physical conditions and environment must be main- 
tained. 

b) The vocation, task, or duty should be analyzed to deter- 
mine the special human faculty concerned. 

c) Tests should be applied to determine in what degree candi- 
dates possess special faculty. 

d) Habit should be formed on standardized bases, old or new. 

e) Esprit de corps must be fostered. 

/) Incentive must be proportioned to effort expected. 

It may be interesting to subjoin here a brief comparison of the 
chief principles put forward by Taylor and Emerson, and show their 
place in relation to this tentative attempt to formulate the funda- 
mental and constructive principles of management. 

Mr. Taylor's principles. — Mr. Taylor's "scientific management" 
is a collection of axioms and an arbitrary combination of specific 
mechanisms rather than a body of principles. Among its leading 
features, time-study, functional foremanship, standardization, plan- 
ning in advance, and task-bonus may be selected as characteristic. 

The place of time-study is obviously under the first principle, 
namely, the systematic use of experience. It is a tool for supple- 



BASIC FEATURES OF ADMINISTRATION 821 

meriting and extending our experience, and its economic limitations 
have been discussed under that heading. Functional foremanship is 
related to the principle of the economic control of effort, and par- 
ticularly to the division of administrative effort. 

Standardization belongs to the same principle, and its particular 
niche is under the head of conservation of effort, in an avoidance of 
complexity where uniformity and simplicity can be maintained. In 
reforming old industries, standardization usually means cutting 
down, but in new industries it means the avoidance of unnecessary 
kinds, sizes, and methods. It means building up along the lines of 
least effort — either result flowing readily from acceptance of the 
sub-principle of the conservation of effort. 

Planning in advance is largely an application of the co-ordination 
of effort. A certain amount of planning is inherent in every estab- 
lished routine, because the very idea of division of effort necessarily 
implies some measure of co-ordination. The necessity for preserving 
flexibility acts as a limiting condition to planning too elaborated and 
intensive. 

Task-bonus is, of course, a special variety of application of 
remuneration of effort. Its value as a practical device must rest 
upon the degree to which it actually promotes personal effectiveness. 
It is one of many methods of remuneration, but the conditions to 
which this and the other methods apply in the most effective degree 
have not yet been studied and compared in any serious way. 

One more point of Taylor's system may be mentioned. It is his 
claim that the science which underlies each act of each workman is 
so great that no workman is able to fully understand it (and pre- 
sumably give it effect) without specific and very detailed guidance 
from above. This point has been covered by what has already 
been said on the subject of forming new traditions and habits based 
on the new knowledge that recent progress has given rise to. 

This is obviously a case of applied systematic experience. If 
Mr. Taylor had in mind the use of his slide-rules in making this 
claim, then it is obvious that the use of such slide-rules, where they 
are useful, should become as much a part of the man's working habit 
as is the use of shifting gears or other devices for controlling the 
working of the machine. 

Mr. Emerson's principles. — Emerson's twelve principles will not 
detain us long. His first principle, " clearly defined ideals," is not 
especially an industrial principle. It is presupposed that a man 



822 BUSINESS ADMINISTRATION 

knows what he wants or he can do nothing successfully. It certainly 
comes, however, under the head of systematic use of experience, if 
we try to apply it practically. His second principle, " common sense," 
is hardly a principle at all. It is simply one of the basic conditions of 
all successful human endeavor, and might be ranked with "sound 
judgment," " perseverance," and other moral and mental attributes. 
It is not especially industrial. 

His third principle, "competent counsel," must also be ranged 
under the systematic use of experience. It means from those best 
qualified to provide it. His fourth principle, "discipline," comes 
under the division of administrative effort. 

One of the prime functions of administration is to secure discipline, 
that is, to prevent irregular activities which are not co-ordinated 
with the useful activities necessary to the work. Idleness, absence, 
disregard of instructions are examples of unco-ordinated, and there- 
fore harmful effort. 

The fifth principle enunciated by Mr. Emerson is "the fair deal." 
This is a psychological matter belonging to the promotion of personal 
effectiveness. His sixth principle, "reliable and immediate records," 
is, of course, the function of comparison spoken of, though not the 
whole of it. The seventh principle, "dispatching," comes under, and 
in fact is, the practical mechanism of the co-ordination of effort. 
The eighth, ninth, and tenth principles, "standards and schedules," 
"standardized conditions," and "standardized operations," have 
been discussed under the Taylor system; so with the eleventh, 
" standard-practice instructions." 

In these four cases standardization means conformity with the 
principle of conservation of effort, while standard-practice instruc- 
tions are a part of planning, and therefore of co-ordination, of effort. 
Finally we have the twelfth principle given by Mr. Emerson, namely, 
"efficiency reward," which is simply another phrase for "remunera- 
tion of effort." 

These illustrations have been made to demonstrate that as far 
as can be seen at present the three fundamental principles formulated 
in this paper, with their derivatives, do actually find a place for all 
divisions which modern analysis of industrial working has brought 
to light. 

The important point is, of course, that by stating and fixing what 
are believed to be the three basic and fundamental principles of 
industrial activity, and deriving the subordinate details from these 



BASIC FEATURES OF ADMINISTRATION 823 

in logical order, a beginning has been made toward finding a truly 
scientific basis for the art of management, on which all its prime 
facts can be built up, later, into a coherent and understandable system 
of theory and practice. 

6. MEASURING AND COMMUNICATING AIDS OF 

CONTROL 

A. STATISTICAL REPORTS FOR THE CHIEF EXECUTIVE 



The principal objectives of the use of statistics in business are: 
1. To ascertain inner, controlling, master facts which cannot 
be ascertained by casual observation of the complex mass of obvious 
facts which constitute the experience of the business and in which 
they are contained. The sales manager about to undertake a sales 
campaign, does not trust to chance or to casual observation more 
than is necessary. He investigates and analyzes characteristics of 
the consuming public in a market — estimates among other things 
their probable demand for and capacity to purchase the particular 
commodity he proposes to introduce and the kind of advertising 
methods to which the purchasers of that market are most likely to 
react. The utility corporation analyzes statistically a growing 
suburb before it determines its policy of extension and capital invest- 
ment. The merchandise and credit managers of a wholesale distrib- 
uting house estimate the purchasing power of a region, through the 
statistical analysis of crop and other governing conditions, before 
determining policy with respect to a season's business. The manager 
of a retail store may analyze sales of different articles by sizes, seasons, 
etc., in order to determine a quality, quantity, and seasonal schedule 
of purchases, thereby adjusting orders to probable turnover. 

2. To determine standards by which to value and guide current 
performance and in terms of which to estimate future performance. 
The merchandise manager of a department store receives each morn- 
ing a summary sheet showing sales of the preceding day compared 
with sales of the same day the year before; cumulative sales of the 
month to date compared with cumulative sales of the corresponding 
period of the year before and with estimates for the current month; 

Adapted by permission from H. S. Person, "Statistical Control, Including 
Costs as a Factor in Production," The Annals of the American Academy of Political 
and Social Science, LXXXV (1919), 144-46. 



824 BUSINESS ADMINISTRATION 

cumulative sales of the year to date compared with those of the 
corresponding year before, and so on. He can ascertain at a glance 
whether sales are going well; if they are not he may institute at once 
a special sales campaign — likewise any business selling commodities 
or services. A production manager time-studies operations under 
different conditions and with different materials and methods, and 
by statistical treatment of the data establishes several standards — 
standards of conditions, of materials, of methods, of performance. 
He can then value and guide current performance and can estimate 
with precision future performance. He may keep his record in terms 
of units of output and in terms of units of cost. Cost units are no 
different from other units in statistical treatment. A telephone 
company analyzes statistical records of calls and establishes a standard 
of performance for an operator or for a system and on the basis of 
these standards can determine whether an operator is efficient or a 
system is approaching the volume of business for which it will be 
inadequate, requiring extension or replacement. The electric light or 
telephone or other similar company by statistical records determines 
the hours, the days, and other seasons when its various peak loads 
are bound to occur, and establishes operating policy accordingly. 

The use of statistics in determining such standards for measuring 
current performance and estimating future performance is one of the 
latest developments of the use of statistics in business, offers one of 
the most profitable instruments for improvement in managerial 
methods, and unfortunately involves some of the greatest dangers of 
misuse. These misuses are prevalent in current practice. The first 
is the error of so organizing the function of recording, classifying, and 
analyzing data as to secure the returns too late for use in controlling 
current operations, in which case the statistics are but records of past 
performance and have so limited a usefulness as to raise the question 
whether they are worth the cost of collection. The second error is 
that the units of enumeration may not be homogeneous, and to the 
extent that they are not, their value in the control of current 
practice or of forecasting future performance is invalidated. 

The third error in the use of statistics in establishing standards 
and measuring performance is that the units of statistical record 
may not correspond to the units of the operating processes. This is 
a common error, for only too frequently the statistical function is 
not recognized as a production function, and the statistical depart- 
ment and methods are developed independently of the production 



BASIC FEATURES OF ADMINISTRATION 825 

department and methods. The analysis of processes by the produc- 
tion manager for the purposes of operating control is different from 
that of the statistical department for purposes of record, with the 
result that the statistics fail to be useful to the production manager. 
The same authority that approves the establishment of prochiction 
methods should approve the establishment of statistical methods in 
so far as they are concerned with statistics of operation, in order to 
insure that the units of statistical record shall be identical with the 
unit process of production. Furthermore, the only way of assuring 
such correspondence is to make the " papers" which control produc- 
tion the original documents from which statistical data are drawn. 

3. To establish a series of facts which suggest tendencies or permit 
comparisons which suggest causal relations, or at least correlation, 
between series. Time curves may be plotted showing sales — by 
salesmen, by territories, by articles, etc. By these the sales manager 
may keep informed concerning the sales tendency in a territory, of a 
commodity or of a salesman. Comparison of these curves may permit 
the manager to determine that the salesman whose record of gain is 
best is concentrating on leaders which yield small profit, while a sales- 
man whose record for gain is not so good may be selling a wider variety 
of articles, thereby laying the foundation of a better long-run business 
in his territory. Curves of wages paid, hours of work, output per 
man, separations, hirings, cases of discipline, idle machine time, 
etc., may be compared and correlations proved — i.e., it may be 
observed that when one curve shows a particular tendency another 
shows a similar or different particular tendency. The establishment 
of such correlations permits more accurate forecasting of results and 
the establishment of more dependable policies. There is opportunity 
for the development of statistics of this kind in every business and 
the results may be considerable, but in no two businesses is it the 
same, and each is a field for special study. 

There are many data pertaining to the social-industrial condi- 
tions in which a business is carried on, of importance to every manager 
in determining policy, but to collect, classify, and analyze these would 
be too great a burden of cost for one business. We have in mind 
data relating to crop conditions, prices of basic materials of industry, 
bank clearings, commercial failures, etc., which when consolidated 
and compared throw light on general business conditions. Statistics 
of this sort are now available through statistical service agencies, 
and it is not necessary for the individual business to secure them. 



826 BUSINESS ADMINISTRATION 

But there remains a considerable number of special "lines" of 
statistics, especially pertinent to its materials, products, and markets, 
which a business may profitably maintain. 

4. To determine laws governing industrial operations. A com- 
parison of different lines of statistics might disclose such relations as to 
prove principles to which the term "law" could properly be applied. 
Extraordinarily large numbers of homogeneous data are essential to 
the establishment of laws. These are seldom available in the records 
of a single industrial concern. The most noteworthy case of the 
scientifically precise observation, recording, classification, analysis, 
and general statistical treatment of industrial data which has led to 
the formulation of laws, was the study by Mr. Taylor and his 
associates which led to the discovery of the laws of metal-cutting, 
which revolutionized that art. The hope of the discovery of laws 
governing industrial operations depends upon the pooling of the 
statistical interests of many concerns — co-operative statistics which 
will yield homogeneous data in great volume. 



See also p. 180. Wage Incentive: A Wage Formula, 
p. 319. Some Phases of Market Analysis. 



IP 

In the first place, it must be recognized that the reports for the 
chief executive must be simple and condensed. Too many or too 
elaborate reports are as bad as no reports. In instances where a 
properly selected system of reports for the executive has not been 
worked out and a heterogeneous mass of reports is constantly supplied 
to him, it generally happens that many of the reports receive scant 
attention. The executive is too busy with other matters to spend 
his time in ploughing through a mass of details which could have been 
presented in summary form. He needs reports prepared especially for 
bis purposes. If these summaries indicate the need of more detailed 
information from any department, it is always possible for the execu- 
tive to secure the detailed reports and records from which the sum- 
maries were prepared. The summaries for the chief executive should 
enable him to detect irregularities which call for further expla- 
nation, and to judge tendencies affecting the business as a whole. 

1 Adapted by permission from M. T. Copeland, Business Statistics, pp. 551-54. 
(Harvard University Press, 19 17.) 



BASIC FEATURES OF ADMINISTRATION 827 

To the regular reports may be added summaries of the results of any 
casual tests or occasional experiments in which the executive is 
interested. 

The following plan is outlined for purposes of illustration. A 
system of this sort would apply to a manufacturing company, such 
as a shoe factory, textile mill, or foundry, which is turning out stand- 
ardized products. The same general scheme is applicable, with some 
modifications, to other maaufacturing companies and an analogous 
scheme would apply to a mercantile business such as a wholesale 
house or a department store. 

Daily reports: Orders (number and value), production (quan- 
tity), shipments (quantity or value), and delinquent deliveries 
(number and value). This last item is added because the mere 
fact that it is being constantly reported to the executive will tend 
to have a salutary effect upon the whole organization and help to 
keep the volume of delinquencies at a minimum. A daily record 
of the first three items should suffice to show the general tendencies 
of the business from day to day, at least so far as these tendencies 
are revealed by statistics. 

Weekly reports: Total orders for the week, total orders to 
date (since beginning of season or year), unfilled orders, total 
production for week, total production to date, man-hours (total and 
percentage of normal) or machine-hours (total and percentage of 
normal), spoiled or second-grade product (quantity and percentage 
of total production). Two of these items, it is to be noted, are 
totals of daily figures. For comparative purposes it is ordinarily 
desirable to include with these weekly reports statistics for the total 
orders received during the corresponding week and the total orders 
to the same date in the preceding year. The production figures may 
likewise be compared with the corresponding figures for the preceding 
year, or, if a schedule has been worked out, with the schedule. 

Monthly reports: Orders for each class of product (total for 
month, total to date), orders by sales districts (total for month, 
total to date, and comparison with quotas), returned goods, produc- 
tion by departments (total and percentage of normal), materials 
used (total for month and total to date), material on hand, stock in 
process (for these last three items figures should also be given to show 
the increase or decrease over the preceding month), and labor turn-over. 
For several of these items statistics should also be given for the corre- 
sponding period in the preceding year in order to facilitate comparisons. 



828 BUSINESS ADMINISTRATION 

The monthly reports should be presented in a form which en- 
ables the executive to compare the results for one month with those 
for preceding months. In many businesses, where the demand is 
seasonal, "peak loads" occur regularly in certain months and one 
of the problems which faces the executive is that of lessening the 
disturbing influence of peak loads upon his organization. 

A set of reports such as is outlined above will give an executive 
a knowledge of the main facts about his business so far as they 
are represented by statistics. Many of these statistics, as a general 
rule, can advantageously be presented in graphic form. From 
these reports general tendencies should be revealed and irregularities 
detected. The reports should indicate whence more detailed state- 
ments can be obtained for each period. 

B. ACCOUNTING AS AN ADMINISTRATIVE AID 1 

Assuming that the matter to be dealt with under the head of 
accounting has to do with the use of business reports, the next step 
is to consider from what various standpoints data need to be gathered 
and reports prepared. Who are the parties who are interested in the 
business, and what is the nature of their respective interests? The 
answer to this question may help to explain the great increase in 
demand for trained accountants which has made itself felt in the 
last few years. 

It is not difficult to see that in a business organized as modern 
large-scale industry is organized, there will be need for reports for at 
least two purposes: 

i. To furnish each one of the functional managers with informa- 
tion that will enable him to judge how well his subordinates were 
carrying out their duties, and to aid him in planning and carrying 
out his own duties in a successful manner. 

2. To furnish the president or general manager with data that will 
enable him to judge of the success of the work of his subordinate 
managers and also enable him to determine the policy of the business 
as a whole and correlate the work of his subordinates in such a way 
as to carry out this policy consistently. 

While the reporting for managerial purposes is the chief function 
of accounting, there are also other interested parties to whom reports 
must be submitted. The various parties who have investments in 

1 Adapted by permission from A. C. Hodge and J. O. McKinsey, Principles of 
Accounting, passim pp. 6-n. (The University of Chicago Press, 1920.) 



BASIC FEATURES OF ADMINISTRATION 829 

the business desire to be able to judge of the profitableness of that 
investment and the desirability of continuing it or of adding to it. 
Also, it may be found desirable to interest additional investors and 
thus secure additional capital to extend the business and place it on 
a more profitable basis. The prospective investor would demand that 
information be furnished him to give him some idea of the condition 
and earning power of the business before he would risk his funds by 
investing them therein. 

Another class which is keenly interested in the financial and 
operating health of the business enterprise is the creditors. There 
are two chief kinds of creditors besides the bondholders who have 
already been included among the investors, though strictly speaking 
they are really long-time creditors. The two kinds of short-time 
creditors are: (1) trade creditors, and (2) commercial banks. Both 
classes typically require reports setting forth the financial condition 
of the concerns which apply to them for credit. Some commercial 
credit agencies and many banks have standard forms upon which 
applicants for credit are required to make reports. The emphasis in 
these reports is somewhat different from that in reports to owners 
and long-time creditors like bondholders, but on the whole they 
usually contain about the same information as the latter. And 
neither type of report presents anything like as difficult a problem in 
accounting as the first class mentioned, namely, the reports for 
managerial purposes. 

Such a business as we are discussing may also be of such im- 
portance, owing to its mere size, or to the nature of its product, that 
it involves a public interest in the way the business is carried on. 
There is nothing new or strange about this as applied to the so- 
called " utilities," such as the common carriers, the gas and electric 
companies, etc. In the case of these businesses it is recognized that 
the public is closely concerned and regulation is undertaken with the 
double purpose of making sure: (1) that the service rendered is 
adequate and satisfactory in quality, and (2) that it is rendered at a 
reasonable rate. It is easy to see that no regulatory body could 
hope to accomplish much along the lines indicated unless they were 
furnished with reports showing the amount of investment in the 
company in question, along with its earnings and expenses. 

The necessity of reporting to government agencies is not confined 
to the utilities, however, but extends now to practically every busi- 
ness enterprise. The requirements of reporting for the purpose of 



830 BUSINESS ADMINISTRATION 

the income, excess profits, and war-profits taxes have practically 
forced even the most insignificant businesses into some sort of record- 
keeping. 

To summarize our discussion with regard to the various parties 
interested in the modern business, and demanding reports prepared 
from the records kept in that business, we may indicate these inter- 
ested parties as follows: 

1. The managerial staff 

a) President or general manager 

b) Sales manager 

c) Head merchandise man, or purchases manager (in a commercial 
business) 

d) Factory superintendent or production manager (in a manufac- 
turing business) 

e) Comptroller or financial manager 

/) Other functional managers, varying with the organization of 
the business 

2. Investors, present and prospective 

a) Stockholders, of various classes 

b) Bondholders, also of various classes 

3. The creditors 

a) Trade creditors 

b) Commercial banks 

c) Other creditors 

4. The government 

a) For regulation of the price 

b) For regulation of the quality 

c) For purposes of taxation 

d) For purposes of limitation on the amounts of certain materials 
and services that can be used 

e) For the protection of those employed — regulation of hours, 
wages, working conditions, child labor, female labor, etc. 

Given a certain type of business organization, with relations to 
investors, creditors, and the public, it is the accountant's task to 
determine what forms of reports will best serve the various purposes 
for which reports are needed, to ascertain what data will need to be 
gathered to serve as a basis for the preparation of these reports, to 
design a system of records which will facilitate the gathering and 
necessary analysis of this data, and finally to prepare from the data 



BASIC FEATURES OF ADMINISTRATION 831 

thus gathered the reports and schedules determined upon. This task 
is not an insignificant or an easy one. 

To prepare him for this task several things are necessary: 

1. He must acquire some insight into the nature of the problems 
in the solution of which the business executive may reasonably expect 
aid from the accountant. 

2. He must have some idea of the type of information desirable 
to aid in solving these problems and of forms of reports in which this 
information may be presented. 

3. He must understand the analysis necessary to make available 
the desired information and the various possible bases upon which 
this analysis may be made. 

4. He must learn how to design forms of records which will 
enable him to provide for the recording of individual business trans- 
actions, evidenced by various types of business papers involved, in 
such a way as to provide the analysis which has been decided upon 
as desirable. 

See also p. 335. Measuring Aids Reflected in the Profit and Loss 
Statement, 
p. 475. What the Balance Sheet Shows. 
p. 482. What the Profit and Loss Statement Shows. 
p. 595. Measuring and Communicating Aids: Cost 
Accounting. 



C. BUDGETARY CONTROL 1 

The planning which may be done in connection with any business 
is of three kinds: 

1. That which deals with the operations of the separate depart- 
ments of the business, such as production, sales, and finance. 

2. That which deals with the co-ordination of the operations of 
the several departments to the end that a well-formulated program 
may be made for the business as a whole. 

3. That which deals with the determination of future conditions 
and the shaping of the plans of the business to meet these conditions. 

The discussion in the following pages is restricted to planning of 
the second kind. Furthermore, it is restricted to a discussion of the 
more elementary principles of this method of planning. 

1 Adapted by permission from Budgetary Control for Business, pp. 1-17. 
Prepared under the direction of J. O. McKinsey. (Boston Chamber of Com- 
merce, 192 1.) 



832 BUSINESS ADMINISTRATION 

The procedure to be followed by a business firm in the installation 
and operation of budgetary control is very similar to that of a govern- 
mental unit. A possible procedure, stated briefly in outline form, 
is as follows: 

1. Each department prepares an estimate of its "activities" for 
the budget period. How these activities are stated depends on the 
nature of the operations of the department. The sales department 
states the sales it expects to make and the estimated expenses it will 
incur in making these sales. The production department states the 
estimated production for the period and the estimated cost of this 
production. The "service" departments, such as the personnel 
department, the traffic department, the auditing department, and the 
office manager's department, state the estimated expenditures of their 
departments. Because of the interdependence of these departments, 
some will need to use the estimates of other departments in making 
their estimates. For instance, the production department must know 
the estimated sales before it can estimate the production necessary 
to meet the sales demands; the treasurer must know the plans of all 
the departments before he can estimate his cash receipts and cash 
disbursements. Consequently a procedure must be set up which 
provides for a proper schedule of the estimates with reference to 
preparation and distribution. 

2. The departmental heads will transmit the departmental esti- 
mates to an executive who has supervision of the budgetary program. 
Sometimes the Comptroller acts in this capacity, while, in many cases, 
this duty is delegated to a member of the staff of the General Manager 
or President. This official combines the estimates of all the depart- 
ments into a proposed budget for the business. This proposed budget 
should show the estimated receipts from all sources and the estimated 
expenditures by all departments of the business. 

3. The official in charge of the budget program makes a com- 
parison between the estimated revenues and the estimated expendi- 
tures as shown by the proposed budget. If the estimated expenditures 
exceed the estimated revenues, one of the following courses of action 
must be taken: 

a) The departmental expenditures may be reduced. In making 
such reductions a problem arises which is not usually involved in the 
reducing of governmental expenditures, namely, the reduction of 
expenditures may result in a reduction of revenues. For instance, if 
the expenditures of the advertising department are reduced, this may 



BASIC FEATURES OF ADMINISTRATION 833 

result in a reduction of sales. In the same manner, a reduction of the 
expenditures of the production department may result in a reduction 
of production with the consequent lack of sufficient goods to meet 
sales demands which will involve a reduction of revenue from sales. 
Care must be taken, therefore, in the reduction of expenditures to 
see that revenues are not reduced correspondingly. 

b) Additional capital may be secured. If it is not deemed wise 
to reduce expenditures, plans must be made to secure additional capi- 
tal with which to finance the excess of expenditures over revenues. 

The officer in charge of the budgetary program may make recom- 
mendations with reference to possible procedure, but he is usually not 
invested with authority to determine the plans to be followed. 

4. The proposed budget, as prepared by the officer in charge of 
the budgetary program, is submitted to an advisory committee, com- 
posed of the principal executives of the company and presided over 
by the President. This committee considers the proposed budget 
and makes such revisions as it thinks necessary. In case the proposed 
budget involves important changes in the company's policy, or 
involves significant plans of financing, it may be necessary to submit 
it to the Board of Directors for consideration. In some businesses all 
budgetary plans are submitted to the Board of Directors for approval. 
After the preliminary budget, as prepared by the executive in charge 
of the program has been approved, it constitutes the working program 
for the budget period. The budget, as adopted, sets limits upon the 
expenditures of all the departments. These limits cannot be exceeded 
without the permission of the Advisory Committee. The budget also 
sets up a standard of performance for certain departments. For 
instance, it states the sales that are to be made by the sales department 
and the goods which are to be produced by the production department. 

5. Each department makes plans which will enable it to carry 
out its program as outlined under the budget. For instance, the 
advertising department makes contracts for advertising space; the 
sales department sets quotas for its salesmen; the production depart- 
ment through its planning department sets up schedules of production. 

6. Proper records are established that the performance of each 
department may be properly recorded and comparisons made between 
the estimated and the actual performance. Periodic reports are made 
to the executive in charge of the budgetary program and are by him 
transmitted to the Advisory Committee, and in some cases to the 
Board of Directors, which show a comparison between the estimated 



834 BUSINESS ADMINISTRATION 

and the actual performance of each department for the period. Based 
on these reports, the Advisory Committee, or Board of Directors, may- 
make such revisions of the budgetary program as it may deem 
desirable. 

Budgetary control, if properly executed, accomplishes the follow- 
ing results: 

1. Co-ordination of sales and production, 1 (a) by estimating sales 
possibilities and planning production to produce the goods necessary 
to meet these possibilities; (b) by limiting production to the amount 
necessary to meet probable sales demands as shown by the sales esti- 
mate and thus preventing an excess inventory of finished product. 

2. The formulation of a profitable sales and production program. 

(a) By determining the lines of goods most desirable for a well-rounded 
sales program and adapting production, in so far as is consistent with 

(b) below, to produce the necessary quantity of these lines; (b) by 
determining the lines of goods most desirable for a well-rounded 
production program and planning sales, in so far as is consistent with 
(a) above, so as to sell the amount of these lines necessary to secure 
economical production. 

3. Proper control of expenditures, (a) by requiring the preparation 
by each department head of an estimate of the expenditures of his 
department during the next budget period ; (b) by requiring the sub- 
mission of these estimates to the Advisory Committee (a committee 
composed of the chief executives of the business) for consideration 
and approval; (c) by the prohibition of any expenditures in excess 
of the departmental estimates without the permission of the Advisory 
Committee; (d) by requiring the submission of monthly reports 
showing a comparison between the actual expenditures for the 
month and the estimated. 

4. Formulation of a financial program, (a) by the estimating of 
cash receipts based on the sales program and the estimate of collec- 
tions; (b) by the estimating of cash disbursements based on the 
production, purchasing, plant and equipment, and departmental 
expense budgets; (c) by determining the excess of disbursements over 
receipts and the preparation of a financial program which will secure 
funds to provide for this excess. 

5. Co-ordination of all the activities of the business, (a) by the 
preparation by each department of an estimate of its activities during 

^he points here brought out with reference to co-ordination of sales and 
production in a manufacturing business apply as well to co-ordination of sales 
and purchases in a mercantile business. 



BASIC FEATURES OF ADMINISTRATION 835 

the budget period; (b) by the studying of these departmental estimates 
by the departmental executives and the Advisory Committee; (c) by 
the modification of the activities of each department to the end that 
they co-ordinate with the activities of each other department; (d) by 
the preparation of an estimated balance sheet and an estimated state- 
ment of profit and loss showing the anticipated results of the operations 
provided for by the budgetary program; (e) by the formulation of 
plans and policies which will make possible the attainment of the 
estimated results as shown by the financial reports prepared in (d) 
above. 

The scope of the budget program is indicated by the statement 
of its purpose. It includes all the activities of the business. It 
involves the following: 

1. Preparation of an estimate of: 1 (a) sales, (b) purchases, (c) 
production, (d) labor cost, (e) manufacturing expense, (/) plant and 
equipment cost, (g) administrative expenses of each department, 
(h) selling expenses of each selling unit, (i) funds required to finance 
these estimates. 

2. Co-ordination and approval of these estimates by a central 
authority. 

3. Monthly reports making possible control and revision of the 
estimates as approved. 

It is as essential that the limitations of budgetary control shall 
be understood as that the benefits which may be derived from it may 
be realized. These limitations may be stated as follows: 

1. The budgetary program is based on estimates. Estimates 
cannot be made which are entirely accurate, and consequently they 
must be used with judgment and not followed arbitrarily. It is also 
necessary that provision be made for frequent revisions of these esti- 
mates as actual performance shows variations from the estimated 
performance. 

2. Budgetary control cannot take the place of administration 
and management. It is not its purpose to deprive executives of the 
necessary freedom of action which is essential to progressive manage- 
ment. Its purpose is to provide the information on which adminis- 
trative decisions and administrative control are based. 

3. Budgetary control cannot be perfected immediately. The 
procedure called for by the budgetary program is usually new to 

1 The estimates suggested here are those required by a manufacturing busi- 
ness. The estimates for a mercantile business can be easily determined by analogy. 



836 BUSINESS ADMINISTRATION 

executives, and it takes time to train them to properly make and use 
estimates of future plans. Too much should not be expected at the 
beginning from the installation of budgetary control. 

It is impossible to make any estimates or plans for budgetary 
control until the length of the budget period is determined. The 
length of the budget period is governed by a number of factors, the 
most important of which are, (a) the nature of the business with 
particular reference to the length of its turnover period, (b) the method 
of financing employed, (c) the market conditions, (d) the adequacy 
and completeness of the data with reference to past operations. 

Before it is possible to proceed with the operation of a budgetary 
program, it is necessary to formulate an organization by which its 
operation will be effected. The budgetary program contemplates 
the co-ordination of the activities of all the departments into a pro- 
gram for the business as a whole. It is obvious that it is not desirable 
for this co-ordination to be undertaken by any one of the departments 
which is to be subject to the control exercised in its accomplishment. 
This responsibility must be vested in an authority which is inde- 
pendent of any department. Consequently control of all matters 
pertaining to the budgetary program is usually vested in the President 
of the Company. In most cases he delegates a considerable part of 
his authority to a staff assistant who has direct control of budgetary 
plans and procedure. To provide a central control of budgetary 
plans and to bring about co-operation and co-ordination there is often 
created an Advisory Committee composed of the heads of the principal 
departments and presided over by the President. This Committee 
must approve all estimates before they become effective. The 
responsibility for the preparation of the departmental estimates is 
placed upon the heads of the departments. In some companies after 
the budget is approved by the Advisory Committee it is submitted 
to the Board of Directors for consideration and approval. 

The duties of the President, the Advisory Committee, the Staff 
Assistant to the President, and the Departmental Heads with refer- 
ence to the budgetary program may be summarized as follows: 

a) The President. ■ 

The President of the company has direct control over all matters 
pertaining to the budgetary program. All officers to whom authority 
is delegated by him are acting as his agents and are responsible to him 
for the proper performance of their duties. In all cases of disagree- 
ment between departments with reference to the co-ordination of 
estimates, the decision of the President is final. 



BASIC FEATURES OF ADMINISTRATION 837 

b) The Advisory Committee. 

Under the authority and direction of the President, the Advisory 
Committee considers all departmental estimates and makes such 
changes and revisions as it thinks desirable. No estimate is effective 
until it has received the approval of the Advisory Committee. In 
the consideration of the departmental estimates the Advisory Com- 
mittee may call on departmental heads to explain the reasons for 
any variations in their estimates from the performance of past periods. 

The committee receives through the Assistant to the President 
monthly reports showing comparisons of the performance of the past 
month with the estimated performance. On the basis of these reports 
it may make revisions in the budgets for the remainder of the period 
if it deems such revisions necessary. 

c) The Staff Assistant to the President. 

Under the authority and direction of the President, the Staff 
Assistant to the President has general control and supervision over 
the preparation and execution of the budgetary program. His general 
duties may be classified under the following headings: (1) To receive 
from the departmental heads the monthly estimates discussed above; 
(2) to transmit these estimates to the Advisory Committee with such 
recommendations as he may think necessary; (3) to receive from the 
Advisory Committee the estimates as approved and to transmit these 
to the departmental heads; (4) to receive monthly reports prepared 
by the operating departments or the General Auditor's Department 
showing the departmental performance for the month; (5) to transmit 
monthly reports to the Advisory Committee showing a comparison 
between the actual performance and the estimated performance for 
the month for each department and to make such recommendations 
as he may deem necessary; (6) to transmit to departmental heads 
any revisions in the original estimates which have been made by the 
Advisory Committee; (7) to recommend to the President, and the 
Advisory Committee, such changes in the budgetary procedure as 
he may deem desirable. 

He has the implied authority to do all things which are necessary 
to the proper performance of these duties. 

d) The Departmental Heads. 

These executive heads of the various departments are responsible 
for the preparation of the estimates of their departments. Any 
recommendations which any departmental executive desires to make 
with reference to changes in budgetary procedure must be transmitted 



838 BUSINESS ADMINISTRATION 

in writing to the Assistant to the President. He will refer these 
recommendations to the Advisory Committee. 

As previously explained, after the budgetary program is formu- 
lated it is necessary to have periodic reports showing the performance 
of each department that a comparison may be made between the 
estimated and the actual performance. It is necessary, therefore, 
that two things be done: (a) reports desired be determined, (b) 
responsibility fixed for the preparation of these reports. 

After the departmental estimates have been approved, it is 
necessary for each department to formulate plans to carry out its 
estimate. The method by which this is done will vary with the 
different departments. For instance, the sales department may find 
it necessary to set up quotas for the different sales units and for 
salesmen at each unit in order to secure the amount of sales called 
for by its estimate. The production department will find it necessary 
to set up balance of stores records that the inventory schedules called 
for by the production budget may be maintained, and to operate a 
planning department that its schedule of finished goods may be 
enforced. Other departments will find it necessary to use similar 
means to carry out their budgetary program. 



See also p. 337. Measuring Aids, Quotas and Budgetary Control, 
p. 520. Budgeting for Cash Receipts and Disbursements. 



D. STANDARDIZATION 

[The student will do well to read this selection with the issue, 
"Should a business have a division or department of Standards and 
Records?" before his mind. If so, should it be responsible for 
"measuring and communicating aids" ?] 

I 1 

The forward march of civilization has only been rendered possible 
by the adoption of standards. Standards passed on from father to 
son and from generation to generation represent the ratchets on the 
wheels of progress, and have enabled each forward step painfully and 
slowly made, to be maintained. Without the privilege of drawing 
on the accumulated experience of the race as represented by its 
standards, each individual would be compelled to start in right at 
the beginning and progress would have been impossible. 

1 Adapted by permission from G. C. Harrison, Cost Accounting to Aid Production, 
pp. 33-34, 39-40. (The Engineering Magazine Company, 192 1.) 



BASIC FEATURES OF ADMINISTRATION 839 

Whereas the savage had very few and simple standards, as civili- 
zation developed standards increased in tremendous degree both as 
regards number and complexity, and in modern life the standards 
covering the multitudinous activities of human kind are of incalculable 
number. 

Until recent years the standards followed by the various trades 
were largely rule-of-thumb or traditional knowledge, and as Mr. 
Taylor stated in the Principles of Scientific Management, " instead of 
having only one way which is generally accepted as a standard, there 
are in daily use, say, fifty or a hundred different ways of doing each 
element of the work." 

In the management end of industry we also find a variety of 
standards or ideals, many of which are wholly false or only partly 
true. In some concerns the main standard appears to be a large 
tonnage, and where this idea is most rampant, time and time again 
it will be found that at the close of the month light but highly profit- 
able work will be relentlessly sidetracked, no matter how urgently 
required by the customer, in order to manufacture some relatively 
unprofitable but heavy material for which there is no immediate 
demand but which will enable the month's tonnage production to 
appear in a favorable light to the directors. We are all familiar with 
the wild scramble in many shipping rooms at the close of the month 
to get out goods in order to swell the month's shipments. 

The fundamental idea underlying scientific management is the 
substitution of definite, scientifically determined standards for all 
these nebulous ideals, and clearly defined methods of reaching these 
standards for haphazard and rule-of-thumb methods. This obviously 
applies to all phases of scientific management such as time and motion 
study, standard practice instructions and planning and dispatching 
methods. 

Standards and records are as inseparable ideas as latitude and 
longitude, debit and credit, east and west. Standards without 
records are as ineffective as firing at a target would be if the marksman 
had no means of determining whether he was making hits or not, and, 
vice-versa, records without standards would be equivalent to carefully 
recording the result of every shot but giving the marksman no definite 
target at which to aim. With standards and no records we are in 
the position of a traveler with a time table and no watch, while 
conversely with records without standards we are in the position he 
would be with a watch but no time table. 



840 BUSINESS ADMINISTRATION 

A very common illustration of standards without records is 
presented by the concerns who issue many rules and instructions but 
provide no systematic method of ascertaining whether such instruc- 
tions are followed, with the inevitable result that they are "more 
honor 'd in the breach than the observance," and in the innumerable 
systems which are operated in a way far different from that originally 
intended. 

A further illustration of the use of records without standards is 
that of the man who keeps the most minutely detailed account of his 
personal expenditures, but has no budget to work to, with the result 
that having no definite scheme of saving, his accounts do not mate- 
rially aid him in this connection, but merely provide him with the 
sad history of where his money went. 

Numerous illustrations of standards combined with records pre- 
sent themselves, among which may be mentioned: taximeters which 
show the actual amount earned figured at a standard rate for a certain 
distance; the time book on which a red line is ruled at the opening 
hour, all persons signing above the red line being on time and all 
after late; or the recording time clock which shows in printed red ink 
figures all cases of tardy arrivals, or variations from standard. The 
budget systems of finance when properly carried out are perfect 
examples of the effectiveness of combining standards and records, 
the standards being the appropriations made for the various purposes 
and the records showing the extent to which the actual payments 
made conform to these standards. 

IP 

The Century Dictionary defines a "standard" as "that which is 
set up as a unit of reference; a form, type, example, instance or 
combination of conditions accepted as correct and perfect and hence 
as a basis of comparison; a criterion established by custom, public 
opinion or general consent; a model." 

The above definition, almost but not quite, gives the significance 
of the word "standard" as it is used in connection with scientific 
management. If we change it to read: "That which is set up as a 
form, type, example, or combination of conditions accepted as correct; 
a criterion, established as a result of scientific investigation," we should 
have a better definition of the term in the limited sense in which it is 

1 Adapted by permission from H. K. Hathaway, "Standards," Bulletin of the 
Taylor Society, V (1920), 12-13. 



BASIC FEATURES OF ADMINISTRATION 841 

used in this paper. Inasmuch as it is the destiny of mankind to 
constantly advance and improve I would add, parenthetically, "for 
the time being" or "representing the present stage in the development 
of the art." 

We may classify the standards of scientific management under 
the following headings: Equipment: including machines, tools or 
implements, facilities for handling, transporting or storing materials; 
materials; methods; accomplishment; product. 

Standards of accomplishment are dependent upon standards of 
equipment, materials, methods and product. 

Ill 1 

To operate an office efficiently, it is necessary to make critical 
analysis of results and purposes, to maintain a certain standard of 
production or know why it does not exist, and to promote plans 
working for efficiency. 

Several years ago The Curtis Publishing Company began work 
of this nature. It was soon apparent that it could be most efficiently 
handled by staff specialists. A group known as the Standardization 
Division was formed. These people spend their time exclusively in 
the analysis of work, planning of new methods, determination of 
standards, working out and promoting of prize offers, establishment 
of schedules, and in other similar activities. The specialists work in 
all departments, both office and factory. In this way we have one 
department working together for the good of the Company as a whole, 
working with the knowledge of what changes will mean in other 
departments, and working for general efficiency, rather than a number 
of departments working separately and often blindly in so far as 
interdepartmental relationship is concerned for the improvement of 
method and quality, or for their own individual curtailment of 
expense. 

This method may lead you to suppose that our Standardization 
Division has direct authority over our management. This is untrue. 
The division has no authority whatever. They are given free foot 
for unlimited investigation, our cost records are open to them, our 
company problems are theirs — they have the right of appeal. It is 
the job of the standardization force to "sell" their plans to the 
management by demonstrating the practicality and economy of them. 

1 Adapted by permission from W. D. Fuller, "Application of Scientific Prin- 
ciples to Office Management," Bulletin of the Taylor Society, IV (1919), 8-9. 



842 BUSINESS ADMINISTRATION 

In this way, the activities of our managers are in no way hampered, 
their authority is in no way curtailed, while at the same time the 
standardization force is kept keyed up to a high standard of endeavor. 
This method is not the quickest in its action. Evolution never works 
as rapidly as revolution, but its results are lasting. Many things 
can be accomplished in this pleasant way without recourse to the 
doubtful expedient of revolutionary change. Our plan has been in 
effect eight years. The results which have been obtained, the better 
work which is being done, and the savings which have been made, 
have won the hearty accord of even those executives who were formerly 
unsympathetic with the plan. 



See also p. 555. Standardization in Manufacturing. 

p. 2,33- Measuring Aids May Result in Expense Stand- 
ards, 
p. 520. Financial Standards. 



E. ECONOMIC SELECTION 1 

Economic selection is choice based solely on long-run least cost. 
A wooden sidewalk may cost less to build than one of concrete, and 
yet not cost less in the long run, for the wooden sidewalk will require 
repairing and rebuilding much oftener than the concrete. To 
ascertain which sidewalk will cost the less "in the long run" is to 
solve a problem in economic selection. So, to determine which 
promises to be more economical, to build the railroad around or over 
the hill at a low first cost and with a high-annual operating cost, is 
a problem in economic selection. 

The frequency of the occurrence of the problem of economic 
selection may be illustrated by an example taken from transporta- 
tion service. Let us say that transportation service is required 
between two towns. Among the structures which can be made to 
perform this service we have the trail, highway, canal, railroad, etc. 
At this point is met the problem of making the economic selection from 
the foregoing possible structures. Let us assume that the railroad 
is determined to be the most economical structure for the stated 
service. The next step is to choose the most economical route for 
the railroad between the two towns. Assume the choice made and 

1 Adapted by permission from J. C. L. Fish, Engineering Economics, pp. 1-3. 
(McGraw-Hill Book Company, 1915.) 



BASIC FEATURES OF ADMINISTRATION 843 

the center line of the railroad staked out. After the railroad is 
located there arise the problems of selecting the most economical 
structures for its major parts. For example, the service to be per- 
formed by one part of the railroad is to support the track as it passes 
over a valley and stream therein. Shall this part of the railroad be 
a trestle or a bridge ? Let us suppose that a bridge is ascertained to 
be the more economical. Next it is necessary to consider the bridge 
by itself. It may be built of wood, of stone or concrete, or of steel, 
or of a combination of any two or more of these; and it may be of 
any one of several types. Suppose that on making economic compari- 
son, a steel span with concrete abutments is chosen. Next the atten- 
tion is directed to the various parts of the bridge, each in turn, and 
economic selection is made for each part. So the work of making 
economic selection goes on, even to choosing the footing course of 
the abutment and the paint which shall be used to cover the steel 
span. Let us imagine, now, that all parts of the railroad have been 
selected and designed in detail. After this comes the construction. 
There are different methods of constructing each component structure. 
For example, the earthwork can be executed with plows and. scrapers 
drawn by horses, or with steam shovels and cars, or otherwise. For 
each part of the earthwork one of the possible methods must be 
selected. Finally, the railroad must be operated, and economic 
selection must be made from the different feasible ways of conducting 
the operation as a whole, and from the various ways of conducting 
each component operation. 

In the foregoing illustration of the frequency of the occurrence 
of the problem of economic selection we have omitted to mention the 
fact that before any structure can be properly selected from a number 
of feasible structures the major parts and characteristics of each must 
be selected tentatively and in a general way for the purpose of estimat- 
ing cost. The omission of descriptions of advance tentative selections 
does not, however, in any way impair the illustration. 

Wherever it is possible to devise two or more differing structures 
capable of performing a stated service, or to make two or more 
designs for a selected structure, or to devise two or more ways of 
constructing a designed structure, or to devise two or more ways of 
operating a completed structure to perform the stated service, the 
problem of economic selection arises. This is true in the case of small 
as in the case of large structures. 



844 BUSINESS ADMINISTRATION 

It would appear that the principles of economic selection are an 
important part of the knowledge which is indispensable to owners or 
their executives and to all others who hold responsible positions in 
connection with the choice, design, construction, or operation of 
structures. 

See also p. 93. How to Strike a Balance in Location Factors. 



F. THE RANGE OF TIME AND MOTION STUDY 1 

In its original conception the Taylor system of scientific manage- 
ment seems to have been literally a system of shop management con- 
cerned primarily with the problem of efficient manufacture or 
productive efficiency in the shop. The problem was to secure the most 
effective character and use of machinery, tools, and materials, the 
most effective material and organic arrangements in the shop, and 
the full co-operative activity of the workers. 

As time passed, however, the character, scope, and significance of 
scientific management seem to have steadily enlarged in the minds of 
Mr. Taylor, his immediate followers, and his imitators, so that 
when the term ''scientific management" was definitely adopted by 
adherents of Mr. Taylor, as descriptive of his system, the intent, 
apparently, was to emphasize claims for it much broader and more 
fundamental than those originally made — claims which seem to 
warrant the following summarization: 

1. Efficiency, not only in the mechanical aspects and as it depends 
on organic arrangements and human effort in the shop, but with 
respect to the functions of a going industrial establishment, is gov- 
erned by fundamental natural laws, not made by man and unalter- 
able by man. And not only this, but the direct relation between 
productive effort and human welfare, as well as the distribution of 
the products of industry, is likewise governed by such natural and 
unalterable laws, i.e., the specific character and amount of work 
which any laborer can and ought to do, and the proportions of the 
product which ought to go to management and men and to each 
individual workman are thus governed. 

2. Scientific management has discovered the means by which the 
facts underlying these natural laws, which govern production in the 

1 Adapted from R. F. Hoxie, " Scientific Management and Labor Welfare," 
Journal of Political Economy, XXIV (1916), 833-43. 



BASIC FEATURES OF ADMINISTRATION 845 

larger sense — productive welfare and distribution — can be deter- 
mined and established as objective, matter-of-fact data, quite apart 
and divorced from human judgment, opinion, or will; i.e., the means 
by which all productive arrangements and processes, and all the 
relations between managers or employers and workmen, can be 
reduced to an exact scientific basis of objective fact and law — a means, 
in other words, in the application of which human will, judgment, 
and cunning cannot enter so as to affect the result, and which, there- 
fore, will necessarily reveal the truth in regard to the most efficient 
arrangement and method, the kind and amount of work which any 
man can and ought to do, and the share of the product which every 
factor and every individual ought justly to receive. This means is 
time and motion study. 

"Scientific management," declared Mr. Taylor, "attempts to 
substitute in the relations between employers and workers the govern- 
ment of fact and law for the rule of force and opinion. It substitutes 
exact knowledge for guesswork and seeks to establish a code of natural 
law equally binding upon employers and workmen." In time and 
motion study it has discovered and developed an "accurate scientific 
method by which the great mass of laws governing the easiest and 
most productive movements of men are investigated. These laws 
constitute a great code which, for the first time in industry, completely 
controls the acts of the management as well as those of the workmen." 

But, apparently, according to Mr. Taylor, time and motion study 
not only makes possible the ruling out of force and opinion from indus- 
trial affairs, a relatively just distribution of the product, and the pro- 
tection of the worker's welfare at all points, but, coupled with the 
fundamental natural laws which govern all industrial affairs and 
relations, it actualizes this possibility. 

It makes possible the assignment of each worker to the task for 
which he is best fitted, and the safeguarding of him against over- 
fatigue and over-exhaustion; and because of this same harmony of 
interests it turns the possibility into reality. It not only makes pos- 
sible the removal of the higgling for advantage and the rough and 
arbitrary discipline of foremen and employers, but it actually elimi- 
nates these things. 

"Scientific management," declared Mr. Taylor, "democratizes 
industry. It gives a voice to both parties, and substitutes the joint 
obedience of employers and workers to fact and law for obedience to 
personal authority." "No such democracy has ever existed in 



846 BUSINESS ADMINISTRATION 

industry before. Every protest of every workman must be handled 
by those on the management side, and the right or wrong of the com- 
plaint must be settled, not by the opinion of the management or the 
workman, but by the great code of laws which has been developed, 
and which must satisfy both sides." It gives "to the worker in the 
end equal voice with the employer. Both can refer only to the arbitra- 
ment of science and fact." 

There can be little doubt, then, that Mr. Taylor looked upon 
scientific management as truly scientific in the sense that its productive 
and distributive policies and methods are based upon unalterable 
laws of nature and upon facts discoverable, but unalterable, by the 
management or workmen concerned. In this his followers appear to 
have been well in accord with him. Moreover, it is evident that time 
and motion study is the principal means upon which they rely for 
the discovery of this scientific foundation of scientific management. 
Time and motion study, therefore, must be regarded as the chief cornerstone 
of scientific management, its main distinguishing feature, and the point 
of departure for any understanding and judgment of its claims, especially 
with reference to its scientific character and labor welfare. 

In its narrower conception, and as understood by labor, generally, 
time and motion study is looked upon simply and solely as an instru- 
ment for task-setting and efficiency-rating, used thus, in the main, 
to determine how much can be done by a workman engaged in a given 
operation, within a given time, and, therefore, to set the maximum 
task accomplishable by him and the group of laborers to which he 
belongs. Labor thus pictures a cowering workman over whom stands 
a labor driver. In one hand he holds a split-second watch. In the 
other he has a sheet of paper on which are set down the elementary 
motions of which the job is made up, with spaces opposite each in 
which may be recorded the time taken by the workman to make 
each motion. The watch is started. The workman jumps to his 
task. The time taken for each motion involved in the doing of the 
job is recorded. The operation is then repeated enough times to 
satisfy the observer that he has discovered the shortest time required 
by the worker to make each motion. These shortest times are then 
summed up as the necessary time, and this, with some allowance for 
human necessities, breakdowns, and delays, is set as the task time. 

This, I say, is labor's habitual conception of time and motion 
study. It is supposed to be employed only or mainly for the purpose 
of task-setting, and it is assumed to be used to set the minimum time 



BASIC FEATURES OF ADMINISTRATION 847 

or the maximum task to which the laborers can be forced. This view 
of time and motion study, however, accords ill with the later and 
enlarged conception held, apparently, by Mr. Taylor and by many, 
if not all, of the present members of the scientific-management 
group. Judged by this standard, it is erroneous in two very essential 
respects. 

In the first place, time and motion study, according to this later 
conception, when used for task-setting purposes, is not designed to 
discover and set the minimum time or the maximum task, but the 
scientific time or task, i.e., the reasonable or just task, considering 
the technical conditions, the character and training of the workmen, 
the element of fatigue, etc. 

In the second place, time and motion study, in its larger concep- 
tion, is not merely or perhaps mainly a method used for task-setting 
and efficiency-rating. On the contrary, in the light of the recent 
claims based upon its use, made by Mr. Taylor, and of the problems 
to the solution of which it is apparently being applied by progressive 
scientific managers, time and motion must be conceived as little less than 
a universal method of attempted accurate industrial analysis, usable 
with or without the stop-watch to discover at almost every step of the 
productive and distributive process, not only the most effective 
material, organic, and human arrangements, adaptations, and com- 
binations, but the reasonable demands which can be made upon the 
intelligence and energy of the management as well as the men, and 
the just apportionment of the product to all the factors and indi- 
viduals concerned. 

According to statements made by scientific managers, this process 
of analysis, or time and motion study, in the larger sense, should where 
possible begin with the determination of a site for manufacture. The 
really scientific manager, starting out de novo, will consider all available 
sites with reference to the time and motion expenditure, determined 
by actual experiment, necessary in securing an adequate supply of 
proper materials, in the going to and from the shop of the numbers of 
the different classes of workmen needed or likely to be needed, in the 
shipment and marketing of the product, etc. Having in mind the 
character of the productive process, and the most efficient productive 
arrangements possible, he will then, with regard to the greatest possible 
saving of waste time and motion, work out with the utmost care and 
with reference to future expansion the plans for the construction of 
his plant. This will involve a most careful study of all the general 



848 BUSINESS ADMINISTRATION 

internal arrangements and processes, the most efficient methods of 
planning the work to be done and of routing it through the shop so 
that there may be no delay in transmitting orders, no waste carriage 
of materials and partly finished products, no lost time in the assembly 
room waiting for delayed parts. With the same ends in view, and in 
the same manner, he will also determine the most effective placement 
of machinery, the storage of tools and materials, and the location of 
the various elements of the office force. 

The shop constructed and the machinery installed, he will apply 
time and motion study in an endless series of experimental tests to 
determine what possible improvements can be made in machinery and 
its operation, and in the tools, fixtures, materials, and specific processes 
of work. The best feed and speed for each machine, with reference 
to the different grades of materials, will then be established. The 
different jobs or processes will be analyzed and re-analyzed, and their 
elements experimentally combined and recombined, the tools and fix- 
tures changed and rearranged, and all these variations timed and 
retimed in an effort to discover the most efficient productive combina- 
tions and methods. 

This time and motion study analysis will extend, it is thus claimed, 
to every feature and all organic relationships of the mechanical process 
of production. But it will not stop there. It will be extended to 
cover the managerial functions and the office work. The duties of 
the managers, superintendents, and especially of the shop foremen 
will be analytically studied and reorganized. As a result, the work 
of the old managerial functionaries will be split up and new depart- 
ments with new department heads established. In place of the single 
old-line foreman, for example, charged with hiring, discipline, dis- 
charge, apportionment of work, the setting up of jobs, the determina- 
tion of speed and feed of machinery, repair of machinery and belting, 
inspection of the product, etc., there will be a separate head charged 
with the selection, hiring, adaptation, and discharge of workmen, and 
a series of functional foremen, each responsible for a particular duty, 
e.g., a gang boss, a speed boss, a repair boss, an inspector of work, 
an instructor, a route clerk, a time and cost clerk, a disciplinarian. 
The methods of storage and delivery of tools and materials, the dis- 
patching of orders from the office to the shop, the purchasing of 
materials, the marketing of products, and all the methods of account- 
ing will likewise be subjected to time and motion study, in this larger 
sense, with a view to discovering the most efficient means and methods. 



BASIC FEATURES OF ADMINISTRATION 849 

All this and much more is time and motion study in the larger con- 
ception of the term, which seems to be sanctioned by progressive 
scientific managers. And not until, through this broader time and 
motion study, a larger degree of improvement and standardization of 
the general productive process has been well advanced, should the 
scientific manager, according to these experts, enter upon time and 
motion study in the narrower sense, i.e., putting the time-study men, 
with stop-watches, over the workmen engaged in a particular job for 
the express purpose of setting tasks and rates of wage payment. 

Nor, under the direction of this really scientific manager, we are 
told, will this part of the time and motion study correspond to the 
conception of it held by labor. On the contrary, it will be done in 
the same spirit and with the same care that we have noted above. 
It will endeavor to discover by repeated analysis and experimental 
timing the best character, combination, and arrangement of tools, 
materials, machinery, and workmen, the most efficient and convenient 
lighting, heating, and seating arrangements for the workmen, the 
proper period for continuous operation by them, considering the 
element of fatigue, the rest periods needed, their most efficient 
character, combination, and sequence of motions, etc. Moreover, 
these particular job experiments will not be confined to one man, or 
to a few of those who are to accomplish the task. Many men will 
be timed with the idea of discovering, not the fastest speed of the 
fastest man, but the normal speed which the group can continuously 
maintain. If necessary, hundreds and perhaps thousands of time 
and motion studies will be made to determine this, before the task 
is set and the rate established. And whenever a new or better 
method or combination has been discovered by the time and motion 
analysis, which is supposed to continue even after the task is set, 
the whole process of careful and extended timing for task-setting 
will be repeated, and new tasks and rates established reasonably 
conformable to the new conditions. 

Finally, as an integral part of this broader time and motion study, 
all the results secured by it will be continuously and systematically 
filed as a permanent asset and guide to future action. Thus conceived, 
time and motion study appears to be considered a method of analysis 
applicable to practically every feature of the productive and distribu- 
tive process, considered apart from its purely financial aspects, 
a process of analysis applied continuously throughout the life of the 
establishment. And the scientific management based upon it is 



850 BUSINESS ADMINISTRATION 

conceived to be a perpetual attempt to discover and put into operation 
the new and continuously developing technical, organic, and human 
arrangements, methods, and relationships constantly revealed by it 
to be more efficient and more equitable. That this broader conception 
of time and motion study as the essential basis of scientific manage- 
ments exists, not as a mere dream, but as a practical ideal striven for 
with the confident hope of realization, the writer can attest from his 
experiences in the best class of scientific-management shops. 



For other selections bearing upon Measuring and Communicating 
Aids of Administration, see 

pp. 192-226. Measuring Aids of Personnel Administra- 
tion, 
pp. 325-40. Measuring Aids in Sales Administration, 
pp. 370-74. Measuring Aids in Purchase Administra- 
tion, 
pp. 581-602. Measuring and Communicating Aids in 

Production, 
p. 149. Education and Training. 



7. THE NEW INDUSTRIAL LEADERSHIP 1 

If we consider the industrial history of the United States for the 
long span dating backward from this year of grace to about 1840, 
we can distinguish at least three great movements which have 
occupied the minds of men in industry. 

The first period was still engaged in the process of settling the 
country, as previous decades had been. In section after section of the 
newly opened West there was required that basic equipment which 
is the foundation of modern civilized life. Our nation's first industrial 
task was the stupendous one of clearing the farms, and of building 
the common roads, and of establishing villages and cities, and of 
opening outlets for the marketing of surplus products. The victory 
was not to mere parsimony and patience, and the weaker economic 
virtues, but to industry animated with boldness, planning touched 
with imagination, and sacrifice sustained by a vision of a new state 
and a fairer civilization. 

1 Adapted by permission from E. D. Jones, The Business Administrator, 
pp. 1-21. ((The Engineering Magazine Company, 1914.) 



BASIC FEATURES OF ADMINISTRATION 851 

The second industrial movement of the period we are consider- 
ing centered upon the task of providing an adequate mechanical 
equipment. Its characteristic achievement was to develop inanimate 
sources of power, and apply them in a thousand new ways to lift the 
burden of physical toil from human shoulders. Accordingly, the 
second act transfers the scene of chief significance from the field to 
the factory. The first billet of Bessemer steel was produced in 
America in a little furnace at Wyandotte, near Detroit, in 1864. The 
first band-saw was brought from Paris to New York in 1869. The 
first middlings purifier essential to the modern milling process was 
built in Minneapolis in 1870. The twine-binder was invented in 1874. 
In the wonderful centennial year of 1876, there was given to the 
country the telephone, the incandescent light, the typewriter, and 
the first steel-frame building. In the middle years of the seventies 
the hermetical sealing and the refrigeration of fruits and meats was 
achieved, so that a great additional range was possible for the dietary 
of the nation. 

And now that these achievements are no longer in their origins, 
and that the issues called up by them are recognized as virtually 
settled, and as there is no longer any threatening opposition to 
try men's souls in the process of establishing and defending them, 
a third industrial problem can be seen to emerge and become the 
center of interest. This is the question of business administration. 

This administrative phase of our industrial evolution has, of 
course, already a history of value; and this history is concerned with 
the doings of a very interesting generation of men. For years the 
United States, with its enormous domestic market, its ample capital, 
its freedom from tradition, and its colossal daring, has been perhaps 
the most favorable spot in the world for trying out new ideas of 
organization and management. The executives who first took 
advantage of these conditions were, for the most part, self-made 
men. We often refer to the more noted of them as captains of 
industry. The majority were individuals of pronounced motor 
temperament and endowed with exceptional talents: men capable 
of fighting their way upward and of gaining the advantage in a rough- 
and-ready struggle for the survival of the fittest. 

These men seized leadership by right of ability, but, technically 
speaking, they secured it as the perquisite or privilege arising from 
the ownership of great fortunes. They lived in a day when men 
generally managed their own capital. In many cases they were the 



852 BUSINESS ADMINISTRATION 

first to build up institutions of great size in the lines of industry with 
which they were connected. Their policies were like those of most 
conquerors — direct, simple, and intensely personal. Living in a 
highly individualistic and self-confident society, they worked out rules 
of action, each man for himself. As the attention of a new community 
naturally centers strongly upon the process of growth, many of them 
were builders rather than administrators; more comfortable with 
tests of excellence which were physical rather than intellectual, private 
rather than social. As their communities had broken sharply with 
European traditions, and had as yet little applicable history of their 
own, they entertained a poor opinion of lessons drawn from the past. 
As they were devoted to little else than industry, they saw few analo- 
gies between the administration of business affairs and the adminis- 
tration of other forms of social action. 

Being so much in a world of their own creation, they looked upon 
the administration of industrial enterprises purely as a process of 
each man minding his own business. Their organizations were, 
therefore, mere extensions of themselves, usually bearing their names 
and ruled as their households might be. Enterprises so conceived 
were incapable of serving as a rallying-point for the loyalty of the 
various classes of persons who might become connected with them. 
The owner alone was fully energized. He carried staggering loads 
of responsibility, driving affairs forward by individual energy rather 
than by the true administrative process of evoking and guiding the 
energies of others. 

Whatever reservations have to be made in praise, the courage 
and independence of these men must be recognized as splendid. They 
possessed a thorough mastery of details, as a result of the small 
beginnings from which they started. They had the ease and speed 
of decision due to technical mastery and early imposed responsibility. 
They were preserved from errors of theory by a wholesome and inti- 
mate sense of reality. The names of the leaders of this generation of 
giants will long remain household words in America. 

Since the ranks of the first generation of administrators have 
begun to be seriously thinned by death, a notable change has been 
taking place in the character of our industrial leadership, and in the 
conditions under which it is exercised. The growth of business 
into units embracing, under a single administration, hundreds and 
even thousands of stockholders and employees and uniting many 
minds in operations which require long periods of time for their com- 



BASIC FEATURES OF ADMINISTRATION 853 

pletion, call for searching tests of performance, and exact and just 
methods of apportioning rewards, so that the wills of many persons can 
be brought into energetic concurrence. These changes are transform- 
ing the business administrator from a mere owner of private property 
into a responsible agent, exercising delegated authority. They 
increase the element of trust or responsibility or service, for the 
measurement and valuation of which a new outfit of standards is 
urgently needed. 

The occupant of this position will be the central pivot upon which 
a vast number of human relationships will turn. Upon these men 
will rest a sort of trusteeship to preserve the property intrusted to 
them, and a demand of leadership to guide and guard their employees. 
Upon them will also rest a general responsibility to the public to help 
this day to live its life, and this generation to make its contribution 
to progress. The whole situation conspires to create an opportunity 
for a new race of executives, which shall justly appreciate the various 
classes of responsibility resting upon it. 

The old ambition to build up big business units, and to accumulate 
great fortunes, is now no longer so fresh and full of zest as it once was. 
It does not get the response, and call out the best men, as in the old 
dramatic, careless, buccaneering days. To simply repeat what the 
last generation did in the way of piling up fortunes, and to do it on 
the same intellectual and aesthetic and ethical plane, but without the 
novelty of being the first to do it, nor the excuse that first comes 
bread and then the higher things of life, and without even the freedom 
of action and the general applause of the days of laissez faire, is not 
to set forth a very moving aim. The hungry intelligence of industry 
is asking for great new objectives worthy of great efforts. It 
asks for tasks as noble for us now as the opening of the continent 
or the building of the railroads was for a past generation. A 
new and larger conception of the function of industrial leadership is 
called for. 

See also p. 764. The Mental Aspects of Administration. 



REFERENCES FOR FURTHER STUDY 

Church, The Science and Practice of Management. 
Scott, Influencing Men in Business. 
Taylor, Scientific Management. 



CHAPTER X 

ANALYSIS OF A BUSINESS CASE 

Purposes of this chapter: 

i. To get a clearer view of what may be involved in expanding a 
business. 

2. To test our ability to form certain kinds of business judg- 
ments on the basis of some typical business data. 



Throughout this volume there has been frequent use of "case 
material" of the sort that sets forth a series of actual occurrences in 
some field of business activity. These cases have, however, usually 
been narrow in their scope. It is now expedient for us to take some 
"business case" of fairly wide reach and see if we have developed any 
ability to form tentative business judgments. 

The case chosen for this purpose is that of the Noel Slate and 
Manufacturing Company. Noel, a successful salesman in the slate 
business, developed a small-scale manufacturing and selling business 
in this field. A bit later he thought that he saw an "opportunity" in 
the slate business and he decided to reorganize his company so as to 
take advantage of this opportunity. He needed capital. His way 
of securing it was to circulate among his friends and business acquaint- 
ances the following material. You will find it interesting not only 
as an illustration of how such things are sometimes done but also as 
an opportunity to "test your teeth" on an actual problem. 

The material is presented under four heads: 

A. The Engineer's Report 

B. The Accountant's Report 

C. The Prospectus 

D. The Stock Subscription Form 

PROBLEMS 

i. What seems to you the "big idea" which Noel conceived? 

2. Review the selection on "Promotion and the Promoter" (pp. 390-91). 
Indicate the various stages of promotion of the Noel Slate and Manu- 
facturing Company. 

854 



ANALYSIS OF A BUSINESS CASE 855 

3. What is Noel putting into this proposition? What does he hope to 
get out of it ? 

4. At what points, if any, do you criticize the engineer's report ? 

5. At what points, if any, do you criticize the accountant's report ? 

6. What criticisms, if any, do you make of the prospectus? Write a 
better one. 

7. Noel obviously wishes to have control of the new corporation. Has he 
control? If so, is his control secure? If not, suggest appropriate 
ways of getting secure control. 

8. What do you think of the way Noel went about securing funds ? Would 
he have done better if he had gone to some investment credit institution ? 

9. Could this project have been handled better in the form of an individual 
firm or a partnership ? 

10. Assume that you are considering whether you should invest in the stock 
of this new concern. Tabulate the strong and weak points of the 
proposition. What conclusion do you reach ? 

11. Add five problems to this list. 

A. The Engineer's Report 
Part I 

In making this report, our engineer spent a week in the Western 
Vermont Slate Field, and visited all of the mills, quarries, and pros- 
pects mentioned. While the detail lists of equipment were taken 
from the report submitted by your resident engineer, all data and 
statements made in that report were carefully corroborated in detail 
by our engineer. We can, therefore, subscribe to, and indorse that 
report in every particular. 

The credit reports of a prominent mercantile agency are included 
in this report to give evidence of the soundness of the industry even 
conducted in the primitive way it is today. 

Careful reference should be made by interested parties to Bulletin 
No. 586 of the United States Geological Survey, entitled, "Slate in the 
United States," which should really be considered a part of this 
report. 

All letters quoted in this report are now on file in your office. 

INTRODUCTION 

Object. — The object of this report is to determine: First, the 
advisability of entering into the milled slate industry in this field on 
a large scale. Second, the most advisable procedure in the event of 
entering into this industry. 



856 BUSINESS ADMINISTRATION 

Description of the industry. — The quotations in this report are 
from Bulletin No. 586 of the United States Geological Survey, 
entitled "Slate in the United States," by T. Nelson Dale and others, 
to which reference should be made for a technical discussion of the 
composition and formation of slate. 

"The term slate, in ordinary usage, denotes a rock which has more 
or less perfect cleavage, being thus adapted to various commerical 
uses." 

Quarrying. — While in most cases the slate outcrops on the sur- 
face, considerable stripping, or removal of upper soil and rock, must 
be done before slate of any commercial value is reached. The slate 
in the western Vermont field has a dip of from 15 to 50 degrees depend- 
ing upon the locality. In opening a quarry a large hole is dug in 
front of the face of the slate vein to allow easy working of the vein. 
The top of the vein is then stripped down to slate of commercial value. 

The present practice in removing the slate is to drill through the 
exposed face of the vein, at right angles to the cleavage, at intervals of 
approximately 12 to 18 inches, to a depth of about 8 inches. Steel 
wedges are then inserted into these holes and pounded with hammers 
until a slab splits away from the vein. This slab is then hoisted and 
carried to stock by means of an overhead cableway. Until quite 
recent years the drilling was done by hand and the hoisting of the 
rock, and pumping of water from the pit, was done by horse-power. 
At the present time electric power is available and the drilling is 
done by compressed air and the hoisting and pumping by means of 
electric motors. In some veins it is also possible to cut out the slabs 
by means of channeling machines, as in the marble quarries. These 
machines, by means of compressed air drills mounted upon them, 
cut the exposed face of slate into rectangles of the desired size in 
much the same way that ice is cut on an ice pond. After these cuts 
have been made to the desired depth, the slabs are wedged away 
from the main body of the rock. This method is much faster and 
more economical than the old hand method of quarrying. 

After the first hole is sunk additional stripping is done by blast- 
ing, the overburden being blown over into the hole from which the 
slate has already been removed. Practically no powder is used in 
the slate itself on account of breakage. 

The maximum size of slabs removed from the quarry is generally 
governed by the natural joints in the vein. The usual thickness of 
slabs at the present time is approximately six inches, but with the 



ANALYSIS OF A BUSINESS CASE 857 

introduction of modern machinery in the mill, it will probably be 
more economical to use slabs up to 18 inches in thickness. 

Roofing-slate is sawed, planed, split, and trimmed at the quarry. 
The mills for finishing mill stock are generally located at a considerable 
distance from the quarry on account of labor supply, facilities for 
shipping, etc. The mill stock is hauled from the quarry to the mill 
by automobile truck, teams, electric or steam railroad, or in one case 
by boats. 

Milling. — "On account of their peculiar properties slates are 
adapted to a great variety of uses — roofing, flooring, electric switch- 
boards, blackboards, hand slates, billiard and laboratory table tops, 
vats, tubs, mantels, grave linings, wainscoting, hearths, chimney and 
well caps, memorial tablets, bread boards, refrigerator shelves, etc." 

Slate at the quarry is divided into two classes: roofing-slate and 
mill stock. Mill stock would include all of the slate used for the 
purposes mentioned above except roofing. 

The large slabs when received at the mill are laid out by the 
foreman for cutting into standard sizes, or sizes determined by the 
orders on hand, with the least possible waste. They are then placed 
on the bed of a table saw similar to a cross-cut saw in a wood-working 
plant. The saw itself is a circular steel saw, about 48 inches in 
diameter, with coarse teeth. 

After sawing to the required rough size, the slate is split so as to 
finish to the required thickness, and the flat surfaces parallel to the 
cleavage are smoothed down by means of a planer. This planer is 
almost identical with planers used in machine shops for finishing 
iron and steel. The tool covers 8 to 12 inches in width. 

After planing, the slate is removed to a finishing machine called 
a rubbing bed. This machine consists primarily of a disc, or table, 
of cast iron, usually 12 feet in diameter, mounted at a convenient 
height above the floor on a vertical shaft driven by a mortise gear. 
This table revolves at a speed of 70 R.P.M., and sand and water 
are fed onto it at the center. At the present time all sides and edges 
of slabs are finished by holding the slab stationary while the plate 
with its sand and water revolves under it. By the proper distribu- 
tion of weights on the slab, a uniform rate of cutting is secured. 

Beveling of the finished slab is now done roughly with an air 
chisel and finished with a rasp and hand hone. A bevel of f inch 
requires from three to five cuts with the chisel besides the time and 
labor required to finish with rasp and hone. 



858 BUSINESS ADMINISTRATION 

If a finer finish than the rubbed finish is desired it is obtained by 
means of a hand hone, or by a polishing head upon which a hone 
is mounted. 

At present only two of the mills in this field are equipped to drill 
holes in switchboard slabs. 

After the slabs are completed various finishes are applied. They 
are enameled black and baked, oiled, or marbleized as desired. 
Enameling is usually done with an air brush, while marbleizing or 
graining is done by dipping the slab in a tank of water on which the 
color has been floated in the pattern desired. 

After finishing, the slabs are crated for shipment. 

Description of the field. — "The most important district, which 
furnishes the well-known 'green' and 'purple' slates, lies between 
the Taconic Range and Lake Champlain, extending from the town 
of Sudbury, in Rutland County, southward to Rupert, in Bennington 
County, a distance of 26 miles. This belt also passes south-southwest 
into Washington County, N.Y., where, however, it has thus far 
proved of less economic importance." 

This district is shown in detail on the map accompanying this 
report. The locations of quarries and prospects are only approxi- 
mate, except the Cedar Point Quarry and the Lake Shore Slate Co. 
prospect, which are accurately located. 

Practically all of the mills are located in Fair Haven and Hydeville. 

Transportation in the field is furnished by the following: Rutland 
Railway, Light and Power Co. — an electric line running from Poultney 
through Fair Haven to Rutland. Rutland is 16 miles east of Fair 
Haven. Delaware and Hudson Railroad — two branches. Rutland 
Railroad from Rutland North and South. 

The center of the labor supply for this industry, both in the 
quarry and the mill, is in Fair Haven, Vermont. While all operators 
state that there has been a great shortage of labor in the last two 
years, they agree that labor is now becoming more plentiful. The 
labor situation will be discussed later in this report. 

Water in quantities is easily obtained in all localities. 

Coal is scarce at the present time and costs $14.00 per ton. It 
is expected that the supply will increase and the price decrease in 
the near future. 

Electric power is obtainable in any desired quantity at all points 
from the Rutland Railway Light and Power Co. at approximately 
1 1 cents per kw-hr. The current is 220 volts, 3 phase, 25 cycles, 
but 60 cycle current can be obtained if demanded. 



ANALYSIS OF A BUSINESS CASE 859 

Cutting-sand for rubbing and polishing is readily obtained 
locally in large quantities. 

Crating-lumber is available from local mills at an average cost 
of $35.00 per thousand feet, delivered. 

EXISTING QUARRIES 

(See map on page 860 for location) 

NO. I 

Name. — W. H. Pelkey Quarry. 

Location. — About 1 mile south of Fair Haven, in Vermont, on 
Rutland Railway Light and Power Co. electric line. 

Owner. — W. H. Pelkey, Fair Haven, Vermont, owns the quarry 
and about 200 acres of land surrounding. 

Transportation. — The output is at present handled in a mill 
owned by the same party, located about § mile from the quarry. 
Good road down grade all the way past mill to Delaware & Hudson 
railroad station. All hauling is done at present by one team. 

Product. — At present this quarry is producing nothing but green 
slate for structural and roofing purposes. This slate is of no value 
whatever for electrical purposes and is even too hard for good struc- 
tural stock. The present quarry is therefore valueless for the pur- 
pose of this report. Mr. Pelkley claims to have a high-grade, clear 
vein on one end of his property, and is very anxious to dispose of it. 
This property was investigated by our engineer in company with your 
resident engineer, and Mr. John R. Mahar, a practical quarryman 
with about 40 years' experience in this field. It was decided that 
this purple prospect was of no commercial value whatever for the 
following reasons: (1) not sufficient purple slate in sight to justify 
working; (2) slate of good color but entirely too hard; (3) vein 
covered by large hill of hard rock; (4) on account of its extremely 
favorable location, and the scarcity of clear purple slate, this property 
would have been worked years ago if investigation had justified it. 
The property has been trenched by someone to determine the length 
and character of the deposit, but the results apparently did not 
justify working. 

Equipment. — The present green slate quarry is equipped with: 

One io"Xio" belt-driven, single stage, air compressor 

One 35 horse-power motor for compressor 

One double drum hoist 

One 25 horse-power motor for hoist 

Two masts and complete cableway equipments 



86o 



BUSINESS ADMINISTRATION 



Two shanties and trimmers for roofing-slate 

One small blacksmith shop 

Working force. — Seven men, driver and one team. 

MAP OF THE FIELD 




Quarry* Slate 

i Green and Variegated 

2 Green and Variegated 

3 Purple 

4 Variegated 

5 Variegated 

6 Variegated 



Quarry* Slate Prospects Slate 

7 Purple Variegated A Purple 

8 Purple Variegated 

9 Green 
io Mottled 
ii Purple Variegateu 
1 2 Purple Variegated 



B Purple 

C Purple 

D Purple 

E Purple Variegated 



* Locations of quarries and prospects are approximate only. 



ANALYSIS OF A BUSINESS CASE 86l 

Output. — As operated at present the total output of green mill 
stock will probably average about 7,000 feet per month. 

Sale or lease. — Mr. Pelkey will sell the entire property including 
land, quarry, purple prospect, and mill for $90,000.00. The mill 
will be discussed later in this report. The quarry property is of no 
value to a company contemplating the manufacture of electrical 
slate on a large scale. 

NO. 2 

[Omitted] 

NO. 3 

Name. — Cedar Point Quarry. 

Location. — About 4 miles north of Hydeville, in Vermont, on 
Lake Bomoseen. 

Owner. — Penryhn Slate Co., Hydeville, Vermont, own the quarry 
and 50 acres surrounding. 

Transportation. — In summer the slate is hauled to the mill at 
Hydeville in barges towed by launch. In winter the hauling is done 
on sleds on the ice. In spring and fall, especially spring, hauling 
must be done over the shore road around the lake. This road is 
not very good and is very bad in the wet weather in spring. Haul 
by road is between 5 and 6 miles. 

Product. — The product of this quarry is the best grade of purple 
slate being produced in this field. It is the only slate from this 
field that the General Electric Co. will purchase. 

Equipment. — 

Three cableways 

Two double drum hoists. 34" drum. 25 horse-power motor 

One I4 ,/ Xi2 // Inger soil-Rand, belt-driven, single stage air com- 
pressor 

One 40 horse-power motor for compressor 

Derrick for loading stock 

Incline track from quarry to mill with cars and hoist 

One scow i5'X3o', 40 tons capacity 

One motor boat 25 feet. 12 horse-power motor 

There is a rough mill located at the quarry which will be dis- 
cussed later. 

Working force. — Twenty-seven men. 

Output. — They report average monthly output of 25,000 square 
feet. 



862 BUSINESS ADMINISTRATION 

Sale or lease. — This company is willing to sell this quarry together 
with another quarry producing roofing-slate, and both mills. The 
mills will be discussed later. They have been unable to get out 
enough stock to keep their own mill running at its capacity of 40,000 
feet per month. While this quarry produces the best slate of any 
quarry now operating in the field, it is not considered a good purchase. 
Owing to physical conditions it would be very hard, and perhaps 
impossible to increase the output to 100,000 feet of finished slate per 
month. Being a very profitable enterprise the price asked would 
undoubtedly be very high. 

nos. 4-12 
[Numbers 4-12 of the original report are omitted from this 
reproduction. They raise no new problems. So far as method is 
concerned, they differ little from the reports on Numbers 1 and 3.] 

PROSPECTIVE LOCATIONS FOR NEW QUARRY 

(For locations see map on page 860) 

A 

Name. — Lake Shore Slate Co. property. 

Location. — West Castleton, Vermont. About 4 miles north of 
Hydeville, and about 5J miles from Fair Haven. 

Owner. — The Lake Shore Slate Co., of Hydeville, Vermont, holds 
title to all real and personal property. There is no mortgage on this 
property. This corporation is capitalized for $80,000. The prin- 
cipal owner, with whom all dealings should be made, is Mr. Lester 
Hazard, who lives on the property, and whose father originally 
operated it. 

Transportation. — As shown on the map, there are two roads 
available for hauling stock from this property. The west road, 
away from Lake Bomoseen, is the best road and hauling over it 
would not conflict with the hauling from the Cedar Point Quarry 
who use the lake road. It would also be very easy to carry stock 
from the quarry to the lake by cableway and carry down the lake 
either in scows or on the ice. 

Product. — This property was opened up on one end of the vein 
years ago and operated profitably. It has not been operated how- 
ever since the death of Mr. Hazard's father. The quarry which 
was opened is now filled with water to a depth of 50 or 60 feet. This 
could easily be pumped out in about one week. The slate exposed 
in this old quarry is the best clear purple slate in this field. It is 



ANALYSIS OF A BUSINESS CASE 863 

even better than that produced at Cedar Point. The vein is approxi- 
mately 25 feet thick, 75 feet deep, and 1 mile long, all on this property. 
Approximately 10,000 feet of slate is all ready to take out of the old 
quarry as soon as the water is removed. The present hole extends 
to the bottom of the vein. 

Equipment. — There is one old cableway on the property that 
might be used. No other equipment that could be used. 

Output. — There is approximately 10,000,000 feet of good slate in 
sight from surface indications. This would probably be exceeded in 
operation. By opening the vein at several points a production of 
100,000 feet per month could easily be reached. 

Sale or lease. — The entire property covers 640 acres. Mr. Hazard 
will lease the entire slate property, including the necessary area for 
dumps, etc., for a flat monthly rental not dependent upon the amount 
of slate taken out. He made a tentative price of $400 . 00 per month, 
but this could probably be cut to $350.00 in closing. There is an 
old mill on the property and also a water-power wheel of 80 horse- 
power. If these were included in the lease the price would be $100. 00 
per month additional. Neither of these items should be included as 
the mill is of no use on account of age. 

If desired will sell entire property. No price quoted. 

Remarks. — This vein has a very steep dip, probably about 

50 degrees. As there are few natural horizontal joints, the property 

was difficult to work in the old days on account of the great size of 

the slabs. This is not believed to be a great disadvantage with 

modern machinery. It would probably be possible to make use of 

the trenching machines used on the vertical slate in the Maine field. 

This is the only objection that could be found to this property locally 

It was pronounced by Mr. M. R. Johns as the best property in the 

field. 

B-F 

[The descriptions of these prospects are omitted. They do not 
differ in method from the description of prospect A.] 

SLATE MILLS NOW LOCATED IN THIS FIELD 
NO. I 

Name. — J. H. Prince. 

Location. — One mile north of post-office in Fair Haven, Vermont. 

Owner. — J. H. Prince, Fair Haven, Vermont. 

Buildings. — 

One building 5o'X8o' frame, two-story for about half its length 

Two small sheds attached 



864 BUSINESS ADMINISTRATION 

One office attached 

6,500 square feet total floor space 

Equipment. — 

Three 10 horse-power electric motors 

One rubbing-bed 12 feet in diameter 

Two Ruggles saw tables, 6'o"Xio'o"; 7'o"Xio'o" 

Two Ruggles saw tables, 4'6"X8'o"; 3'6"X6'6" 

Two Ruggles planers, 3'6"X7'6"; 4'o"X9'6" 

One Ruggles planer, 5'o"Xio'o" 

One bench saw for crating 

One power operated crane for unloading 

One industrial track with car from crane through mill to dump 
, One belted Gould duplex pump 

One grindstone and carborundum wheel for sharpening saws and 
planer knives 

One saw bench in box shop on second floor. 

Toilet facilities. — Poor. 

Heat.— Stoves. 

Shipping facilities. — No railroad siding. Haul to railroad station 
about f mile from mill. 

Product. — Electrical slate 72 per cent; structural slate 12 per 
cent; billiard slate 9 per cent; grave vaults 7 per cent. Some 
roofing. 

Output. — Claim ouput of 5o ; ooo feet in past six months. This 
is probably high and 40,000 feet would be nearer the facts. The 
mill has a capacity of 10,000 feet per month. 

Statement of billing. — 

Electrical slate ... . 25,591ft. $19,081.66 

Structural slate ..... 4,185 ft. 2,615.08 

Billiard slate 3,151ft. 1,299.35 

Grave vaults 2,354 ft. 762.00 

Totals . 35,281ft. $23,758.09 $23,758.09 

Roofing slate 608.69 sq.ft. 7,834.92 

Jan. 1, 1920, Inv. R. Slate . . $2,354.00 

Oct. 1, 1920, Inv. Slate . . . 1,500.00 854.00 

$ 6,980.92 6,980.92 

Total $30,739.01 

The foregoing billing is for period January 1 to October 1, 1920. 



ANALYSIS OF A BUSINESS CASE 865 

Working force. — Eight men. 

Credit report. — The following credit report was secured. 

Aged about 40, married, and has been engaged in the slate business 
here off and on for years, apparently maintaining a clear record and meet- 
ing with fair financial success. In the fall of ioog, he became associated 
with a local slate quarry, later purchasing same and has since operated in 
his own name. The quarry is being gradually developed. 

Repeated efforts have been made to obtain a statement from him but 
he has never been disposed to furnish any information respecting his 
financial condition. 

Is in good personal standing and regarded competent in this line. He 
is credited with the ownership of quite a fair amount of real property on 
which there is understood to be some mortgage encumbrance, but he is 
credited with having a substantial equity therein, and he is found assessed 
on the last Grant Tax list with various properties aggregating a total 
investment of $20,300. He is also credited with having some money 
invested in personal securities, carries a good averable balance at bank 
where he has been known as a borrower to a considerable extent, retiring 
his paper as agreed and he is looked upon here as responsible for his ordi- 
nary business requirements, but in the absence of a detailed showing of 
his financial condition, it is found difficult to advance a definite estimate 
of his net worth, though in some quarters it has been estimated at $50,000 
or more. Prospects are regarded favorable. 

Has the name here of taking care of his obligations in a satisfactory 
manner. 

No fires. 

Sale or lease. — Will sell complete property consisting of quarry 
and mill for $90,000. This price is considered excessive even if the 
property were desirable, which it is not. The mill has not nearly 
enough capacity for the purpose of this report, and is not sufficiently 
well built to justify expansion to the desired capacity. 

Remarks. — As the slate obtained from the quarry is not of the 
proper quality, and the mill is not desirable, this property does not 
deserve any further consideration, except for the cost and selling 
price information contained in the foregoing description. 

nos. 2-10 

[These numbers are omitted. They follow, in general plan, 
Number 1. The essential figures for our purposes are contained in 
the following summary table which covers all ten cases.] 



866 



BUSINESS ADMINISTRATION 



TABULATION OF DATA REGARDING TEN SLATE MILLS NOW 
OPERATING IN THE WESTERN VERMONT FIELD 



w 
n 


Name 


Month- 
ly 
Output 
Feet 


Floor 

Space 

Square 

Feet 


Num- 
ber OF 

Saw 
Tables 


Num- 
ber OF 
Rub- 
bing 
Beds 


Num- 
ber of 
Plan- 
ers 


. Number of Employees 


p 


Quarry 


Mill 


Total 


I... 

2. . . 


J. H. Prince. 


6,700 

10,000 

25,000 

4, 000 

5,000 

6,000 

8,000 

15,000 

15,000 

12,000 


6,500 
5,200 
13,625 
9,180 
4,200 
3,800 
4,95° 
6,425 
8,850 
6,125 


4 
4 
9 
5 
4 
4 
3 
6 
11 
5 


I 
I 

4 
2 

1 
1 
2 

3 
3 
2 


3 
3 
9 
2 

4 
3 
3 

5 
8 

3 


8 

9 
27 

4 

5 
15 
12 

6 
12 

5 


8 

10 
24 
10 
10 
10 
20 
20 
20 
10 


16 
19 
51 
14 
15 
25 
32 
26 


3 ■ . . 




A. . . 




<.. . . 




6... 




7. . . 




8... 




o. . . 




32 
15 


IO. . . 










Totals 


106,700 


68,855 


55 


20 


43 


103 


142 


245 



PRODUCTION AND DEMAND FOR MILL-STOCK SLATE 

The records of the United States Geological Survey from 1879 
to date show that from 1879 to 1884 slate was produced for roofing 
purposes only. The table on page 867 shows the value of slate pro- 
duced, for purposes other than roofing, from 1884 to date. From 
1905 to date this slate is classed as "Mill Stock." 

It is estimated by some of the most experienced men in the 
industry that the production of mill stock slate for the year 1920, 
in the state of Vermont, will approximate 1,200,000 feet at an esti- 
mated valuation of $780,000. This is 100 per cent increase over 1918. 

At the present time it is impossible to purchase any finished slate 
in this field, especially electrical slate, for delivery in less than six 
months. All mills in the district state that they are from six to 
eight months behind in their orders, and they are receiving no can- 
cellations of orders. 

It will be noted from the data given for the mills in the field 
that in order to be assured of a steady supply of slate to meet their 
requirements, such firms as the Brunswick-Balke-Collender Co., 
Otis Elevator Co., Cutler-Hammer Manufacturing Co., etc., have 
been compelled either to enter the field themselves, or to contract 
for the entire output of a quarry and mill. Furthermore they are 
compelled to use inferior slate for electrical purposes. It is univer- 
sally conceded that the clear purple slate is the best slate produced 
in this state for electrical purposes. It will be noted, however, in 



ANALYSIS OF A BUSINESS CASE 



867 



the detailed report that only one mill in the district, namely the 
Penryhn Slate Co. is producing this clear purple slate. 

It will also be noted from the detailed report of mills that none 
of the better class of mills desires to sell, and that prices quoted on 
mills and quarries are out of all reason. This condition is of course 
due solely to the excellent condition of the business as a whole. 
This in spite of the fact that there is not an efficient quarry or mill 
in the entire state at the present time. 



Year 



1884. 
1885. 
1886. 
1887. 
1888. 
1889. 
1890. 
1891. 
1892. 
1893. 
1894. 
1895. 
1896. 
1897. 
1898. 
1899. 
1900. 
1901. 
1902. 
1903. 
1904. 
1905. 
1906. 

I9P7. 
1908. 
1909. 
1910. 
1911. 
1912. 

I9I3- 
1914. 

I9I5- 
1916. 
1917. 
1918. 



Value of Mill Stock 



Vermont 



$245,016 



257,267 

260,000 

128,194 

202,307 

93,849 

99>9I5 

39,701 

119,782 

94,702 

121,988 

177,874 
126,101 
228,729 
162,421 
178,295 
251,531 
175,683 
196,911 

307,347 
308,811 
287,197 

273,583 
346,645 



291,241 
281,895 
379,226 



Entire U.S. 



8,000 
10,000 



684,609 



700,336 
720,500 
314,124 
489,186 
347,191 
482,457 
427,162 

594,150 
507,916 
644,284 

673,H5 
745,623 
911,807 
947,906 
921,657 
1,219,560 
943,409 
793,304 
876,089 

999,098 
1,027,605 
1,013,220 
1,233,838 
977,930 
819,672 
1,177,260 
1,277,249 
1,498,164 



Average Price 

Per Square 

Foot 



50.I57 
.165 
.171 
.192 
.178 
.166 

•195 
.182 

.179 
.200 
.230 
.310 



A visit was made by our engineer to the plant of the General 
Electric Co. at Schenectady, New York, on Friday, November 12, 1920, 
to interview them regarding the demand for slate for electrical purposes. 



868 BUSINESS ADMINISTRATION 

Mr. Patterson, of the Switchboard Engineering Department, 
stated that slate for switchboard purposes had always been difficult 
to obtain, and that for the past year the conditions had been such 
that slate was almost impossible to get. He stated that they always 
preferred the black Monson slate from Maine, as this only required 
oiling to be ready for use. The output of this district is, however, 
so very limited, that the greater part of their slate must be obtained 
wherever possible. Mr. Patterson, not being familiar with the 
detail requirements of the company, introduced our engineer to 
Major H. M. Hobbs, of the same department, who supplied the 
following information: 

They always try to carry sufficient slate in stock for six months' 
requirements, but this has been impossible for the past year. They 
have estimated their total requirements for the first three months 
of 192 1 at twenty-seven car loads, of 3,000 feet each, of a total of 
81,000 feet. This is for switchboard use only and does not include 
miscellaneous small stock used for switch bases, box linings, etc. 
Their popular thickness is i| inches. 

Mr. R. E. Carter, of this company, purchases all insulating 
materials. He stated that they had always had trouble getting 
electrical slate, and especially so in the last year. He will not buy 
green or variegated slate for electrical purposes except when it is 
absolutely impossible to get anything else. Mr. Carter has been in 
the Vermont field and studied it in detail. He buys a great deal of 
clear purple slate when it is available, and prefers that from the 
Cedar Point Quarry, which he states is the best slate produced in 
Vermont. He states that there is not only room, but an actual 
necessity for a well-financed, up-to-date plant in this field, producing 
slate of electrical quality. 

Mr. Carter attributes the low production in the field to a lack 
of capital and initiative to put the quarries and mills on an efficient 
basis. He does not credit the statements of the producers that it is 
impossible to obtain labor. He states that on account of the extra 
labor and expense necessary to prepare the colored slate for use, 
over the Monson black slate, that it should sell for less. At the 
present time, however, the colored slates are bringing practically the 
same price. By improved methods the cost of the colored slate 
could be reduced to such a point that it would be more advantageous 
to use it, with a consequent increase in demand. 



ANALYSIS OF A BUSINESS CASE 869 

Interviews by our engineer with various electrical manufacturers 
in the Chicago district have substantiated the above statements. It 
is also found that it is a great deal more difficult for the small manu- 
facturers to obtain slate than it is for such firms as the General 
Electric Co., Westinghouse, etc., who can afford to send their buyers 
into the producing field to purchase the slate at its source. 

It should easily be possible to dispose of the entire output of a 
plant producing 100,000 feet of slate per month by yearly contract 
with firms of good standing, although it would probably be more 
profitable to dispose of the output in the open market at consequently 
higher prices. 

There is no doubt whatever concerning the demand for finished 
mill-stock slate for electrical purposes, without even considering the 
possibilities of stock for billiard tables, structural uses, etc. At the 
time of our engineer's visit to the plant of the Fair Haven Marble 
& Marbleized Slate Co., they were manufacturing all of the interior 
wainscoting, stair treads, etc., for a building being constructed as 
far away as Saskatoon, Saskatchewan. Reference to the reports of 
the United States government will show that the export of finished 
slate is increasing every year. 

It should be remembered also that no campaign of education is 
being conducted for slate as is the case with almost every other 
material at the present time, such as brick, concrete, roofing, etc. 

Users of electrical slate for switchboard purposes have in a great 
many cases been forced to substitute marble for slate owing to the 
great difficulty in obtaining slate when needed. This slow delivery, 
of course, causes additional expense and trouble to the manufacturer 
of switchboards, and also to his customer, due to correspondence 
telegrams, etc., made necessary by the delay. One switchboard 
builder has stated: "The slow deliveries of many of our slate orders 
have easily cost us ten times as much as the slate itself, and we dare 
say these same delays have cost our customers even more." 

Another manufacturer writes as follows: 

We have your letter of November 2 in which you inquire about the 
delays and attendant expense to which we have been put owing to the 
slate situation in the past few months. 

You are, of course, well aware just how we stand on this and we can- 
not put it too strongly that delays incident to transportation difficulties 
and other delays which we understand have been due to the scarcity of 
slate have occasioned us considerable expense, annoyance and loss of 



870 BUSINESS ADMINISTRATION 

prestige with our customers. We aim not so much toward securing this 
material at the best price, as in serving our customers with the greatest 
possible dispatch. 

CONCLUSIONS AND RECOMMENDATIONS 

A close study of the existing conditions in the western Vermont 
field as shown in the discussion of the mills and quarries, reveals 
the fact that, in spite of the primitive methods of working, the lack 
of initiative, and business acumen, all of the plants are operating at 
a good profit. The credit reports also bear this out. 

At the present time, slate is being produced in this field at a 
total cost of 22 to 30 cents per foot of finished product. This cost 
is about equally divided between the quarry and the mill. 

The report on the J. H. Prince mill shows that the average price 
obtained for his slate was 67 cents per foot, or a gross profit of about 
37 cents per foot if we take the highest cost price. 

It must also be borne in mind that these mills are really doing a 
wholesale business and sell only to the larger manufacturers. The 
Noel Slate and Manufacturing Co. have a great advantage over any 
of the mills in their facilities to dispose of slate direct to the user. 
This is emphasized by the following facts. 

The General Electric Co. are now entering into so-called "Instru- 
ment Contracts" with switchboard builders all over the United 
States, and in part consideration of such contracts, they furnish the 
local builders with complete drawings and manufacturing informa- 
tion; also advising them where slate and other materials may be 
purchased. 

The Westinghouse Electric and Manufacturing Co. are expand- 
ing their switchboard business through their service departments, 
located in the principal cities. These local service departments pur- 
chase their own slate. 

It appears, therefore, that there will be a steadily increasing, 
local demand for slate blanks, and that a party carrying complete local 
stocks will be in a very advantageous position to secure the business. 
With existing mills and stocks at Chicago, Pentwater, and Toronto, 
and with others in contemplation, the Noel Slate and Manufacturing 
Co. are meeting the demands created by the latest policies of the 
principal electrical interests. 

In order to obtain the slate necessary to take care of their present 
business, and to make the justified expansion in that business, we 
believe from our detailed study of the conditions in the field that the 



ANALYSIS OF A BUSINESS CASE 871 

following procedure will prove to be extremely profitable, and will 
offer a safe field for investment, with possibilities of immediate 
returns: 

1. Immediate leasing of the property described in this report, 
owned and controlled by the Lake Shore Slate Co., and located at 
West Castleton, Vermont. While this property is not as accessible 
as might be desired, the slate contained therein is of the best quality, 
color, and size, and will be in demand when the variegated and green 
slates will not be accepted. Before completing the lease, we would 
advise having definite confirmation of the practicability of working 
this vein by a practical quarryman, preferably, if possible the opin- 
ion of a man who might later be given charge of the quarry operations. 
This is, in the opinion of our engineer, the only available property 
that will give the amount of slate required, and of the proper quality. 
All users of electrical slate consulted by us agree that their greatest 
trouble is due to lack of output at the quarries in the Winter We 
believe that, on account of the steep dip of the vein on this prop- 
erty, it may prove possible to work it in the French manner, as is 
now being done in the deposits of vertical cleavage in Maine. This 
can only be proved by experiments in operation. In any event the 
water in the present opening should be pumped out before freezing 
solid, and the pit kept free from water, so as to begin producing 
slate for the spring business when the other producers are short. 

2. Closing of an arrangement with the General Slate Co., or 
their operator, Mr. Earle, to supply 10,000 feet of purple variegated 
slate, similar to sample submitted with this report, per month, 
beginning April 1, 192 1. This would insure a mill supply at that 
time in case it was impossible to open the purple quarry this winter. 
This would also aid in the immediate accumulation of large stock in 
your branch mills. 

3. The immediate preparing of plans for the construction of a 
modern slate mill, in the town of Fair Haven, Vermont, with a 
capacity of 100,000 feet of finished slate per month. Part II of this 
report is devoted to detail recommendations regarding the design 
and cost of this mill. We recommend the town of Fair Haven for 
the mill location on account of its being the center of the labor 
supply, having banking facilities, and shipping facilities, and being 
readily accessible for slate-buyers. 

4. The investigation and development of a process for molding 
small switch bases, etc., from slate dust with a possible binder; 



872 BUSINESS ADMINISTRATION 

these parts to be made with the necessary holes cored in, thus avoid- 
ing the expense of drilling. The switchboard engineers of the General 
Electric Co. were particularly interested in the possibilities of this 
process. 

Conclusion. — It is believed that the construction of a modern 
building, with proper toilet facilities, a lunchroom, garage, proper 
heating and ventilating equipment, good floors, and good lighting, 
will insure a plentiful supply of labor. Such a mill will be able to 
pick the best labor in the entire district. With the mill located in 
Fair Haven, labor can be drawn from as far as Rutland on the east 
and Poultney on the south, as these points are connected by the 
electric line which gives good service. 

Our engineer could not find any evidence in the field of a feeling 
of antagonism toward this enterprise. Such a feeling really has no 
basis for existence, as such an enterprise, based upon an output 
greater than the combined output of all the plants now in the field, 
should be a greater boost for the entire industry. It may possibly 
compel those now operating in the field to adopt modern methods, 
and improve their plants, but this would eventually rebound to their 
advantage. It would certainly put the slate industry on a firmer 
business foundation, as it would insure a steady supply of material 
to the user, and would result in more general use of slate for all 
purposes. The immediate community would benefit greatly from 
the increased business activity, the increasing demand for slate, 
and the consequent rise in property values. An increase in pro- 
duction is always of benefit to a community. 

In this connection we wish also to recommend that, if possible, 
an educational campaign be conducted concerning the properties 
and uses of slate. There is a great deal of ignorance manifest in all 
architects' and engineers' offices regarding slate. As it is always 
black when seen in switchboards, the ordinary engineer believes that 
only black slate can be used for the purpose, and draws his specifica- 
tions accordingly. The same is true regarding the use of slate for 
plumbing purposes. It is believed that if engineers and architects 
could be educated to specify purple slate that the demand would be 
greatly increased. 

We believe that the fact that the Noal Slate and Manufacturing 
Co. are in a position to furnish slate cut, beveled, drilled, and finished, 
to specifications on short notice from stock, gives them an exceptional 
position in the slate business, as does their policy of carrying standard 
sizes in stock, for immediate shipment. 



ANALYSIS OF A BUSINESS CASE 873 

Since January, 19 16, they have kept a record of the quantities 
and sizes of slate sold. We have examined this record and we feel 
that we can readily accept their statement that since March, 1919, 
approximately 85 per cent of their orders for sizes wider than 12 inches 
and longer than 24 inches have been for sizes listed in their No. 7 
Price List which list includes all of the switchboard sizes which 
have been standardized by the General Electric and the Westing- 
house companies, as well as many other so-called stock sizes. 

This suggests, indisputably, the wisdom of a " Milled Stock 
Department," instead of the heretofore inefficient practice of milling 
each order separately direct from the rough blocks. We recommend 
that liberal space be alloted for stock sizes of known activity, the 
minimum and maximum limits for each size to be determined and 
revised from time to time, and that mill orders be entered periodically 
for the replenishing of this stock. This will even up the demands 
upon the mill and serve as an excellent " balance wheel" at times 
when the sales curve takes a dip. Strip stock, in widths and thick- 
ness of known demand, but in random lengths, should also be carried 
in stock in liberal quantities, so that orders for small sizes, listed or 
special, may be produced from such stock by cross-cutting on a 
carborundum machine. 

Detail recommendations for the design of the mill will be given 
in Pait II of this report, but consideration should be given here to 
the possibility of reducing cost of production, and increasing output 
by improvements in methods employed. The tabulation of mill 
data on page 866 shows that the average monthly production pe r 
rubbing-bed is 5,335 feet of slate. In all of these plants all of the 
stock is handled by hand on to and off the machine, and the machine 
operator does all of his own clamping, lifting, etc. It is agreed by 
your engineer and ours that this production per bed could easily be 
increased to 12,500 feet per month with one operator. 

Rough stock is now brought in and cut on the saws at an average 
thickness of 6 to 8 inches. We believe that it will prove practicable 
to use diamond- tooth saws and increase this thickness to 12 or even 
18 inches. This will not only reduce the time and cost of sawing in 
the mill but also reduce quarry costs by allowing the removal of 
thicker blocks, thus increasing production at that point. These 
diamond-tooth saws should be built with two cars, so that while 
the saw is working on one car the other can be loaded. The plain 
saw tables used at present are not actually sawing over 25 per cent 
of the time owing to the handling of material by hand. 



874 BUSINESS ADMINISTRATION 

The installation of handling machinery will also increase the 
production of the planers on account of the time saved in setting up 
the work. 

The use of carborundum and diamond saws also increases pro- 
duction by the fact that the cut surface does not have to be finished 
on the rubbing-bed, as is the case with stock cut by the present steel 
saws. 

All of these increases per machine also operate to cut down the 
required floor space, and consequently the cost of the building. 

We firmly believe that close study in the design and operation 
of the plant will reduce the cost of manufacture of finished slate 
from 30 to 40 per cent right at the start, and that further reduction 
can be made after the plant has been in operation long enough to 
become standardized. 

At present waste is removed from the mills by carts. The 
installation of conveyors for this purpose, that will remove the 
waste as it is formed, will increase production by giving greater 
freedom of movement to the operators, and more available floor 
space. 

Nearly all of the labor in this field is American-born and much 
above the average in intelligence and ideals. We, therefore, believe 
that the introduction of some form of bonus or profit-sharing system 
into both the quarry and mill would result in a much lower cost of 
production. This should be given serious consideration. 

[There follows, in the original report, several pages of photographs 
of the quarries, etc., mentioned in the preceding pages.] 

Part II 

[Part I was dated November 19, 1920. This part is dated De- 
cember 29, 1920.] 

This section of the report is devoted: 

Section I. To the equipping and opening of a quarry for the 
production of purple slate and its transportation to the mill. 

Section II. To the location of the slate mill. 

Section III. To the production layout of the mill. 

Section IV. To the complete design of the mill. 

Section V. To an estimate of the cost of quarry, transportation, 
and mill. 

Section VI. To the estimate of cost of operation and produc- 
tion, and estimated profits. 

Section VII. General discussion. 



ANALYSIS OF A BUSINESS CASE 875 

I. QUARRY 

Since the writing of Part I of this report in November, 1920, a 
lease has been entered into by the Noel Slate and Manufacturing Co. 
with the Lake Shore Slate Co. covering the property recommended 
in Part I of the report. This lease calls for a monthly rental of 
$300.00 for the entire slate rights of property regardless of the amount 
of slate removed. The old mill, water-power, and houses on this 
property were not included in the lease, but can be obtained later 
if it is found desirable. 

To the north of the Lake Shore Slate Co.'s property the vein 
continues on the property of George Phillips and beyond this property 
the vein runs on the property of one Andrus. It is reported that the 
vein on these two pieces of property is of equal value with that of 
the property of the Lake Shore Slate Co. We do not recommend 
the actual leasing of these two pieces of property at the present time, 
unless it is found absolutely necessary in order to tie up these rights. 
If these rights can be obtained under option, this should be done 
instead of an actual lease being entered into. 

Mr. M. R. Johns who was mentioned in the first part of this 
report has gone over the Lake Shore Slate Co.'s property a second 
time and advises that the vein should be worked at four openings. 
There are two openings on the property at present which would 
mean that two new openings would be necessary. 

The water is now being removed from the two old openings by 
means of pulsometers and an old boiler which was located on the 
property. The two old openings will therefore be ready for immediate 
working at any time. 

We have had the matter of channeling machines up with the 
Ingersoll-Rand Co. of Chicago who do not believe that the use of 
the rail type of channeling machine would prove practicable on this 
property, due to the narrowness of the vein and the consequent 
frequent benching required to start new cuts. They do, however, 
recommend a bar type machine which we would advise trying out 
after the quarry is started in operation. It may be found, however, 
by experiment that it will be possible to either use the present standard 
channeling machine or develop a special machine for this purpose. 

It is believed that the only successful method of transporting 
slate from the quarry to the mill will be by means of motor trucks. 
The cost of these trucks will be in Section V of this report. 

It has been found that electric power in sufficient quantities to 
operate this quarry is not available at the present time. In order 



876 BUSINESS ADMINISTRATION 

to obtain power it would be necessary to carry a high tension line 
approximately five miles and the Rutland Railway Light and Power 
Co. are at present not in a position to finance this line. It 
would therefore be necessary for the Noel Slate and Manufacturing 
Co. to pay for the installation of this extension, which we are advised 
would cost between $10,000.00 and $13,000.00 including transfor- 
mers. This amount would, however, eventually be returned by 
monthly rebates on the power bill. 

II. LOCATION OF SLATE MILL 

It is recommended that if possible the slate mill be located in 
the town of Fair Haven, Vermont. This town is the center of the 
labor supply in this district and is also the center of both banking 
and shipping facilities. Due to the fact that several of the parties 
at present operating slate mills in this district are members of the 
Board of Trade of Fair Haven and to their attitude, indicated in pre- 
liminary negotiations, we do not believe that any concessions will be 
made by the town of Fair Haven in order to have this industry 
located at that point. The price of the land, however, should not 
be a serious consideration compared with the entire cost of the 
enterprise. It might be possible by further negotiations to obtain 
exemption from taxation for a considerable period. 

A piece of former residence property is available for building 
purposes in the immediate neighborhood of Durick & Keenan and 
the Old English Quarry Mill, but it is doubtful whether or not this 
property has sufficient area. Its location is ideal for the purpose 
intended as it is located adjacent to both the electric and steam rail- 
roads, and also to the river for the disposal of waste. We would 
recommend a careful investigation of this property regarding size, 
price, etc. 

If the property mentioned above does not prove satisfactory, 
we would recommend the locating of the mill on the eastern edge of 
town between the electric and steam railroads. The property is 
readily available in this vicinity. 

III. PRODUCTION LAYOUT 

The recommended production layout is shown on the accom- 
panying blueprint of drawing No. 703 PA-i. [Omitted — Ed.] It 
may be found advisable to instal one large roughing-saw at the 
quarry so that no blocks will be sent to the mill which are too large 
to be handled on the 8'X 10' saw tables installed in the mill. 



ANALYSIS OF A BUSINESS CASE 877 

Rough stock will be delivered to the mill by motor trucks, from 
which it will be handled into the yard storage by means of the 5-ton 
overhead crane. Stock purchased from other quarries will be received 
on the railroad track and handled to storage by the same crane. 

It will be noted that the machinery in the mill is laid out in 
four distinct units, each independent of the other, but so arranged 
that stock may be cross fed from unit to unit at any stage of the 
process. 

Stock will be taken either from yard storage or direct from trucks 
or railroad cars to industrial cars on tracks projecting from building 
into storage yard. The slate is carried on these cars into the first 
bay of the building, where it is transferred by overhead crane either 
onto horses for laying out, into floor storage, or direct onto the first 
saw tables. By having floor storage at this point, it will not be 
necessary to keep the outside doors open for stock in cold weather. 
The electric cranes in this bay are to be operated from the floor by 
pendant control, so that the man handling the slate will also operate 
the crane. 

Trucks are to be provided with platform at the same height as 
the tables on the various machines. These trucks will be equipped 
with roller bearings and can easily be pushed by hand. By means 
of these trucks, slate is to be transferred from machine to machine, 
or from machine to storage, or vice versa. 

Jib cranes are installed between saws as indicated for handling 
material from one saw to another, from trucks to saws, or from saws 
to trucks. A small amount of storage space is available on the 
floor between saws. A small supply of slate may be stored in this 
space, either on the floor or on one of the push trucks. 

Tongs will be used on jib cranes, and all other hoisting apparatus, 
for quick handling of blocks. Such tongs are now successfully used 
in a great many stone quarries and plants. 

A considerable storage space is provided between the saws and 
the planers, so that these are practically independent units. The 
majority of the slate can be handled by hand when it reaches this 
point. Extra large, heavy pieces will be so stored that they can be 
handled by means of the storage battery lift trucks mentioned later 
in this report. 

A storage space is provided after the large planers for planed 
stock to the rubbing-beds. Material will be handled here the same 
as in the storage between saws and planers. 



878 BUSINESS ADMINISTRATION 

Small pieces, which it is necessary to rub on one side before they 
are planed, will be carried by hand from the rubbing-beds to the 
small planers located against the wall. 

After coming from the rubbing beds, slate will be stored on 
racks, or skids, which will be handled by means of storage battery 
lift trucks into the storage space in the finishing department. 

Refuse from all machines will be thrown into receptacles located 
immediately alongside of the machines. These receptacles will be so 
designed that they can be pushed as trucks, or picked up and carried 
by storage battery lift trucks. It is estimated that one man can 
remove, with a lift truck, all of the refuse from the plant. 

From the storage in the finishing building slate may be taken 
either directly to the shipping department, or to any one of the 
finishing operations by lift truck. 

Ample space is provided on shipping platforms, under the yard 
crane, to allow accumulation and sorting of stock for carload ship- 
ments. 

All supplies such as lumber, sand, etc., will be received on the 
railroad track, or by means of trucks, and handled by yard crane. 

IV. DESIGN OF THE MILL 

The general design of the mill building is shown on accompanying 
blueprint from drawing No. 703 PA-2. [Omitted — Ed.] The yard 
crane and storage yard are to be covered with a corrugated iron roof 
and corrugated iron siding is to be provided down to the top of rail- 
road, cars as shown. Floor will be installed under the crane only at 
the shipping point. The railroad track is depressed under the yard 
crane so as to bring car floors on a level with shipping platform. 

The main building will be of light steel construction with pre- 
pared roofing laid on wood. The entire floor area will be well lighted 
by means of the sash installed in the "A" frame and skylights over 
the roof. The outside walls will be constructed of brick with steel 
sash as indicated. 

Toilet facilities are provided for both shop and office employees. 
Two systems of sewers are contemplated, one for sanitary purposes, 
and the other for the handling of waste from the machines. This 
latter sewer will be so arranged that abrasive compound used on the 
machines may be recovered and used over again. 

Ample electric lighting is provided throughout. 



ANALYSIS OF A BUSINESS CASE 879 

V. ESTIMATE FOR QUARRY, TRANSPORTATION, AND MILL 

QUARRY 

Power service $13,000. 00 

One air compressor with motor 3,500.00 

One air receiver tank ........ 350.00 

Air piping 2,000.00 

Four air hammers 580.00 

Air hose . 100.00 

Steel for drills 400.00 

One drill sharpener, complete 725.00 

Six cableways, complete with hoists . . . . 44,220.00 

Erection, freight, houses, etc 10,000.00 

Total $74,975.00 

Say . $75,000.00 

The foregoing figures include only sufficient equipment to open 
up the quarry. It is believed, however, that the additional equip- 
ment required to reach maximum output will consist only of some 
additional cableways, or derricks, as will develop in course of opera- 
tion, and possibly some bar-channeling machines. It is believed 
that the figure of $75,000.00 is amply high to allow the proper 
beginning of operations. 

TRANSPORTATION 

As is shown later, under estimate for mill, 200,000 feet of slate 
per month must be transported to the mill, or 8,000 feet per day, 
figured on the basis of 25 working days per month. As one board 
foot of slate weighs approximately 15 pounds, one day's supply of 
8,000 feet will weigh approximately 60 tons. It is estimated that a 
3-ton motor truck could make the round trip from quarry to mill in 
two hours, or four trips per day of eight hours. This would give a 
capacity of 12 tons per day, and five trucks would be required to give 
the necessary 60 tons per day. These five trucks should be secured 
for a total of $20,000.00. 

Sometime during the first year, probably at the approach of 
winter, a sixth truck should be secured on account of the more difficult 
operating conditions, and to allow the withdrawal of one' truck at a 
time for repairs. 



880 BUSINESS ADMINISTRATION 

MILL 

Capacity. — 100,000 feet of finished slate per month. (All meas- 
urements are in board feet.) 

Waste. — 50 per cent between rough and finished stock. 

Rough stock. — 200,000 feet per month. 

Average size of rough stock. — 4/0" X8V. 

Average size of finished piece. — 2'o"X4'o". 

Largest size of finished piece. — 4/0" X 7V. 

Average content of rough piece. — 64 feet. 

200,000 . . . , 

— = 3,125 pieces of rough stock per month. 

125 pieces per day (25 days per month). 

15! pieces per hour, or 1 piece every 3.8 minutes, from 

yard storage to first saws. 

RUBBING-BEDS, SAWS, AND PLANERS 

Investigation of all the present plants in the field shows an aver- 
age output of 5,335 feet of finished slate per month per rubbing-bed. 
This should easily be increased by proper handling methods to 
12,500 feet per month. Eight rubbing-beds will therefore be required 
for a monthly output of 100,000 feet of finished slate. 

Present plants show a ratio of two and three-fourths saws per 
rubbing-bed. Fifty-five saws are giving a present output of 106,700 
feet of finished slate per month, or 1,940 feet per saw, per month. 
This should easily be increased to 4,000 feet per month. With an 
output of 12,500 feet per month, three saws will be required per 
rubbing-bed, or a total of twenty-four saws. Consultation with 
operators and manufacturers, and investigation of the following 
table [omitted — Ed.], shows that these saws should be 4'6"X8'o", 
6'o"Xio'o", and 8'o"Xio'o". 

Present plants show a ratio of 2.15 planers per rubbing-bed. 
Forty- three planers are giving a present output of 106,700 feet of 
finished slate per month, or 2,481 feet per planer, per month. This 
should be increased to at least 4,000 feet per month. With an out- 
put of 12,500 feet per month for each rubbing-bed, three planers per 
bed will be required, or a total of twenty-four planers. Consultation 
with operators and manufacturers, and investigation of the following 
table [omitted — Ed.], shows that these planers should be 3VX7V, 
4'o"X8'o", and 5'o"Xio'o". 



ANALYSIS OF A BUSINESS CASE 



881 



ESTIMATE OF EQUIPMENT FOR MILL 

Required Item Cost 

i 5-ton, 3-motor yard crane .... $ 6,500.00 

4 24-inch gauge tracks, each 30 feet long 150.00 

4 Industrial cars 600.00 

8 Saw tables, 8V' Xio'o" 14,900.00 

8 Saw tables, 6V' Xio'o" 12,600.00 

8 Saw tables, 4V X8'o" 10,300.00 

8 Planers, 5V Xio'o" 10,100.00 

8 Planers, 4V X 8V' 8,820.00 

8 Planers, 3'6"X 7'o" 8,400.00 

8 1 2 V diameter rubbing-beds . . . 14,400.00 

2 2-ton, 3-motor cranes 8,000.00 

4 Jib cranes, 24-foot radius, 2000 lb. . . 3,000.00 

4 Jib cranes, 24-foot radius, 1000 lb. . . 2,800.00 

4 Jib cranes, 1 8-foot radius, 2000 lb. . . 2,800.00 

4 Jib cranes, 18-foot radius, 1000 lb. . . 2,400.00 

50 Special push trucks 6,250.00 

3 1 2-foot carborundum machines . . . 6,000.00 

1 Carborundum beveling machine . . 2,000.00 
15 Drill presses 5,000.00 

2 Belt sanding machines 2,000.00 

2 Air brush outfits, complete .... 400.00 

3 Chipping hammers 200.00 

1 7 "X6" air compressor and motor . . 1,200.00 

1 Air receiver tank 100.00 

1 Oven complete 3,000.00 

1 Dipping tank 250.00 

Toolroom equipment 500.00 

4 Storage battery lift trucks .... 12,000.00 
1 Battery charging outfit 500.00 

Office equipment 2,000.00 

Box-making machinery 1,000.00 

Storage racks 2,000.00 

Refuse receptacles 1,500.00 

Erection, freight, etc 10,000.00 

Shafting and belting 5,000.00 

Motors 10,000.00 

Total $176,670.00 

Say $178,000.00 



882 BUSINESS ADMINISTRATION 

ESTIMATE OF BUILDING 

Building 200' X 240', or 48,000 sq. ft. 

Concrete, brickwork, etc $41,800.00 

Carpentry 10,200.00 

Structural steel, skylights, glazing . . . . 55,000.00 

Painting, hardware, roofing, etc 8,000.00 

Heating . . . 17,000.00 

Electric lighting 3,000.00 

Plumbing and drainage 9,000.00 

Power wiring 11,000.00 

Insurance and general conditions .... 6,000.00 

Total $170,000.00 

CRANEWAY 

40' X 240', or 9,600 sq. ft. 

Concrete, etc $ 7,600.00 

Carpentry 200.00 

Steelwork, sash, glazing, etc 22,100.00 

Painting 300.00 

Insurance and general conditions .... 1,800.00 

Total $ 32,000.00 

GENERAL SUMMARY OF ESTIMATES 

Quarry $ 75,000.00 

Autotrucks . , 20,000.00 

Land for mill 5,000.00 

Mill building 170,000.00 

Covered crane way 32,000.00 

Switch track 3,000.00 

Complete boiler plant 13,000.00 

Machinery foundations 5,000.00 

Electric power supply 3,000.00 

Machinery 178,000.00 

Engineer's fee . 51,000.00 

Total . $555,000.00 

While the estimate given is for a plant capable of producing 
100,000 feet of finished slate per month, we would advise installing 
only one unit of machinery at the beginning. This will not only 
allow a thorough trial of the equipment and method of operation, 
but will also establish a source of income before the total expenditure 
is made. We also advise omitting the covered craneway and crane 
until all of the machinery is installed and the plant operating to 



ANALYSIS OF A BUSINESS CASE 



883 



capacity. By leaving out the concrete floor in the three bays in 
which machinery is not to be installed at once, this space would 
serve as a covered storage, and the trucks could be driven directly 
into the building and unloaded with the electric crane in the first 
bay. The boiler plant and heating equipment could also be omitted, 
at least until winter. 

The foregoing procedure would require the following list of 
equipment for immediate installation: 

Item 



No. 

Required 

i 24-inch gauge track, 30 feet long 

1 Industrial car 

2 Saw tables, 8'o"Xio'o" . . . 
2 Saw tables, 6'o"Xio'o" . . . 
2 Saw tables, 4'6"X8'o" . . . 
2 Planers, 5 V'Xio'o" . . . . 
2 Planers, 4V 7 X 8 'o" . . . . 

2 Planers 

2 12 V' diameter rubbing-beds . 

2-ton, 3-motor crane . 

Jib crane, 24-feet radius, 2000 lb. 

Jib crane, 24-feet radius, 1000 lb. 

Jib crane, 18-feet radius, 2000 lb. 

Jib crane, 18-feet radius, 1000 lb. 

Special push trucks . 

1 2 -foot carborundum machine 

Carborundum beveling machine . 

Drill presses 

Belt sanding machine . 
Air brush outfit, complete 
Chipping hammers 



7"X6" air compressor and motor 
Air receiver tank . . . 
Oven complete . . 
Dipping tank . . 
Toolroom equipment .... 
Storage battery lift truck 
Battery charging outfit . . . 
Office equipment ..... 
Box-making machinery 

Storage racks 

Refuse receptacles 

Erection, freight, etc 

Shafting and belting .... 
Motors . . . . . . . . 



Cost 

> 37-50 

150.OO 

3,72S.OO 

3,150.00 

2,575-00 

2,525.00 

2,205.00 

2,100.00 

3,800.00 

4,000.00 

750.00 

700.00 

700.00 

600.OO 

1,875.00 

2,000.00 

2,000.00 

I,5OO.O0 

1,000.00 

200.00 

I40.OO 

1,200.00 

IOO.OO 

3,000.00 

250.OO 

500.00 

12,000.00 

500.00 

2,000.00 

I,000.00 

500.00 

40O.OO 

4,000.00 

2,000.00 

4,000.00 



Total . . $67,182.50 

Call this $68,000.00 



884 BUSINESS ADMINISTRATION 

Building items omitted would be as follows: 

Covered crane way $32,000.00 

Complete boiler plant 13,000.00 

Machinery foundations 3,000.00 

Heating equipment 17,000.00 

Power wiring 6,000.00 

Total omissions $71,000.00 

The general summary of estimates for immediate expenditure 
would therefore be: 

Quarry $75,000.00 

Auto trucks 20,000.00 

Land for mill 5,000.00 

Mill building 147,000.00 

Switch track 3,000.00 

Machinery foundations 2,000.00 

Electric power supply 3,000.00 

Machinery 68,000.00 

Engineer's fee 32,300.00 

Total $355,300.00 

We have not recommended cutting down the investment for 
quarry or trucks, as we believe that the quarry should be opened to 
capacity while the mill is being tried out and developed. 

VI. COST OF OPERATION AND ESTIMATED PROFITS 

With the equipment recommended for the quarry, we do not 
believe that the cost of producing quarry stock can be reduced to 
any considerable extent below the cost in the present quarries. It 
will probably be possible to reduce this cost to some extent later on 
by possible developments of machinery, but we do not believe that 
for the purpose of this report that a lower cost should be considered. 

The table on page 866 of Part I of this report shows a total of 
103 employees in the present quarries, for a production of 106,700 
feet of finished slate per month, or 1,035 feet per employee. It 
must be remembered however that some of these men are engaged 
in taking out roofing-slate, which is not considered in the 106,700 feet 
of mill stock. Also, there are a certain number of men employed as 
foremen, etc., who will not be required in this single quarry. We 
believe that 100,000 feet of finished slate per month can be removed 
from the quarry with a maximum of 40 men. 



ANALYSIS OF A BUSINESS CASE 885 

MONTHLY COST OF QUARRY STOCK 

(25 working days — 8 hours per day) , 

Labor, 40 men at 60 cents per hour .... $4,800.00 

Power 1,000.00 

Rent of quarry property 300.00 

Interest ($75,000 at 8 per cent per year) . . . 500.00 

Depreciation at 10 per cent per year .... 625.00 

Overhead 750.00 

Total $7,975.00 

These figures indicate an approximate cost of $0.08 per foot of 
finished slate for mill stock at the quarry. 

MONTHLY COST OF HAULING 

Five trucks, each making four trips per day of approximately 
10 miles per round trip, at a total cost of 40 cents per mile, per truck. 
Total cost per month, $2,000.00. 
This gives a cost of $0.02 per foot of finished slate. 

MONTHLY COST OF MILLING 

It is estimated that the mill as laid out, when operating at full 
capacity, can be run by a force of eighty men. 

Labor, 80 men at $0.60 per hour .... $9,600.00 

Power 1,500.00 

Heating 650.00 

Interest on investment 

($460,000 at 8 per cent per year) . . . 3,067.00 
Interest on working capital 

($100,000 at 5 per cent per year) . . . 668.00 
Depreciation 

(10 per cent per year on $460,000) . . . 3,833.00 

Supplies 500.00 

Maintenance 500.00 

Overhead 2,500.00 

Total $22,818.00 

With a production of 100,000 feet per month the foregoing gives 
an approximate cost of $0.23 per foot of finished slate for milling 
and finishing. 



886 BUSINESS ADMINISTRATION 

TOTAL COST OF SLATE 

Quarry ........... $0.08 

Hauling .02 

Milling and finishing ....... .23 

Total $0.33 per foot 

While Part I of this report states that the average cost of slate 
in the field is $0 . 30 per foot, this is believed to be too low for total 
cost, as we do not think that the cost of production is at present 
actually known, and do not think that interest, depreciation, etc., 
are included in that figure. It should also be noted, that while the 
selling price is given in Part I at $0.67 per foot, this applies to slate 
as it comes from the rubbing-bed, while the cost given above includes 
the entire cost of finishing, drilling, and crating. For this reason 
the selling price of slate from this mill will actually be greater than 
$0.67 per foot, but to be conservative the profits are estimated on 
a selling price of $0.67 per foot. 

PROFITS 

On the foregoing basis the estimated profits of this enterprise 
would be as follows: 

While the plant will be capable of producing 100,000 feet per 
month for 1,200,000 feet of finished slate per year, we will base our 
figures on sales of 1,000,000 feet per year to allow for possible shut 
down, and an accumulation of finished stock. 

Sales, 1,000,000 feet at $0.67 $670,000.00 

Cost at $0.33 per foot 330,000.00 

Profit $340,000.00 

A profit of $340,000.00 is equal to 61 per cent on an investment 

o f $555> 000 - 00 - 

A profit of $340,000.00 is equal to 50 per cent on sales of 

$670,000.00. 

We believe the foregoing figures to be extremely conservative. 

VII. GENERAL DISCUSSION 

The plant shown on the drawings accompanying this report 
[Omitted — Ed.] is a typical layout, made without consideration of 



ANALYSIS OF A BUSINESS CASE 887 

the property on which the plant will be built. It is not to be con- 
sidered as a final design as the completed plant will depend in detail 
upon the ground and surrounding conditions. The estimates given, 
however, will amply cover any possible change in design. 

It is believed that experiments now being made will prove the 
advisability of designing special machinery, or adapting other exist- 
ing machinery to this industry with great financial benefit. Such 
possibilities however, have not been considered in this report. 

December 29, 1920 Lane AND Lane 

By J. C. Lane 

B. The Accountant's Report 

December 1, 1920 
Noel Slate and Manufacturing Co. 

M. C. Noel, President, 

1318 East 56th St., 

Chicago, Illinois. 

Dear Sir: In accordance with your request, we have audited the 
books of account of the Noel Slate an,d Manufacturing Co. for the period 
July 1, 1920, to October 31, 1920, and are submitting our report, here- 
with, accompanied by the following exhibits and schedule: 

exhibits 
i. balance sheet, october 3 1, 1920 

ii. surplus account statement 

january i, 1920, to october 3 1, 1920 

iii. profit and loss statement 

january i, 1920, to october 31, i92o 
schedule 

a. customers accounts receivable 

certification 

We certify that we have made a careful examination of the books of 
account and other corporate records of the Noel Slate and Manufacturing 
Co. for the period ended October 31, 1920, and that Exhibit I (Balance 
Sheet) is indicative of the true financial condition of the Company as at 
the close of business on said October 31, 1920, subject to verification of 
separate balance sheet items as covered by subsequent comments. 

Respectfully submitted, 

Smith and Jones 

Certified Public Accountants 
JFS*K 



888 BUSINESS ADMINISTRATION 

EXHIBIT I 

Balance Sheet 
October 31, 1920 

RESOURCES 
Current: 

Cash on hand and in bank $ 1,058.21 

Liberty Bonds 400 . 00 

Customers' accounts receivable 

(Schedule "A") ....... 24,447.95 

Merchandise inventory 9,011.12 

$34,917.28 

Deferred: 

Stock in other corporations $10,000.00 

Trade acceptances receivable — discounted . 2,207.11 

Sundry accounts receivable 716.34 

Accrued interest 8.52 

Contracts, etc 1 . 00 

Deferred charges to operation .... 307.11 

13,240.08 

Fixed: 

Buildings $ 5,333-75 

Machinery 8,476.59 

Furniture and fixtures 1,068.04 

Automobile 750.00 

$15,628.38 
Less: reserve for depreciation .... 5,425.14 

10, 203 . 24 



Total $58,360.60 

LIABILITIES 
Current: 

Bank loans payable $ 1,800.00 

Trade acceptances payable 4,353-93 

Creditors' accounts payable 10,737.18 

Customers' allowances ...... 33** 

Accrued pay-roll 265.90 

$17,190.12 

Deferred: 

Sundry notes payable $ 1,000.00 

Sundry accounts payable 214.46 

Accrued liabilities 142.30 

Trade acceptances receivable— discounted . 2,207.11 

3,563.87 

Total $20,753.99 

Capital: 

Capital stock outstanding $20,000.00 

Surplus (from Exhibit II) 17,606.6? 

37,606.61 

Total $58,360.60 



ANALYSIS OF A BUSINESS CASE 889 

EXHIBIT II 

Surplus Account Statement 
January 1, 1920, to October 31, 1920 

DISTRIBUTION 

Jan. 1, 1920, deficit $ 1,955.21 

Oct. 31, 1920, surplus (to Exhibit I) 

Subject to 1920 federal taxes . . 17,606.61 



Total $19,561.82 

ADDITIONS 
Oct. 31, 1920, sundry adjustment . . . . $ 1.00 
Oct. 31, 1920, net profit for period 
(from Exhibit III) 
Chicago factory . $10,408.81 

Pentwater factory 9,152.01 

19,560.82 



Total $19,561.82 



EXHIBIT III 

Profit and Loss Statement 
January 1, 1920, to October 31,-1920 

Expenditures Chicago Pentwater 

Cost of goods sold: 

Merchandise inventory, Jan. 1, 1920 — Est. $ 8,000.00 $ 3,000.00 

Merchandise purchases 31,906.99 4,980.97 

Freight charges 2,344.83 417.30 

Direct labor 4,207.91 8,008.93 



$46,459.73 $16,407.20 
Less: inventory, Oct. 31, 1920 — Est. . . 6,889.39 2,121.73 



$39,570.34 $14,285.47 



890 BUSINESS ADMINISTRATION 

Expenditures Chicago Pentwater 

Factory expenses: 

Executive salary $ 2,100.00 

Superintendent's salary $ 2,136.08 

Inter-factory freight . . . . . . . ...... 603 . 74 

Crating material 475 09 1,406.47 

Ground rent '..-•. . 350.00 

Fuel, light, and power 392.87 1,076.53 

Shop supplies and expense 2,339.85 2,000.15 

Insurance .. . 61.52 162.31 

Depreciation — buildings 227.20 285.79 

Depreciation — equipment 210.29 496.09 



$6,156.82 $8,257.16 

Selling expenses: 

Executive salary $ 2,100.00 $ 1,850.00 

Advertising . 1,456.58 130.00 

Cartage 1,655.77 426.67 

Auto expense 619.98 

Depreciation — automobile 125.00 

$ 5,957-33 $ 2,406.67 

Administrative expenses: 

Executive salary $ 3,048.15 $ 2,406.85 

Superintendent's salary 2,136.08 

Office salaries 699.61 410.89 

Traveling expenses 920.62 540.68 

Life insurance — officers 303.60 60.95 

Printing and stationery 288.22 169.28 

Telephone and telegraph 126.91 74-54 

Postage . 90. 77 53 .30 

Collection and legal expense 97-35 57- 18 

Discount allowed 584.75 343-42 

Interest paid 672.27 394. 83 

Bad debts . 119.98 

Taxes 147.88 

Other sundry expenses . . . . . . 275.92 162.05 

Depreciation — fixtures 87.73 I - 2 7 

. $ 7,463.76 $ 6,811.32 

Total , $59,148.25 $31,760.62 



ANALYSIS OF A BUSINESS CASE 891 

Expenditures Chicago Pentwater 

Net profit for period (to Exhibit II) 

Subject to 1920 federal taxes .... $10,408.81 $ 9,152.01 

Total $69,557.06 $40,912.63 

Sales! Income Accrued 

General $69,338.60 $39,405.01 

Inter-factory 406.00 2,190.85 



$69,744.60 $41,595.86 

Less: returns and allowances .... 668.00 962.45 

Net sales $69,076.60 $40,633.41 

Miscellaneous income: 

Recoveries through claims $ 293.35 $ 172.29 

Discount earned 135. 42 79-54 

Interest earned 46.63 27.39 

Sundry income . 5 . 06 



$ 480.46 $ 279.22 
Total $69,557.06 $40,912.63 



SCHEDULE "A" 

Customers Accounts Receivable 

October 31, 1920 

[It is not necessary to give the details of this list. There were 43 
firms represented in the list, with a total of $24,447.95. The accounts 
were all "good," and no single firm owed more than $2,700.] 



COMMENTS 

Cash, $1,058.21. — This total was distributed as follows: 

Hamilton State Bank $558.21 

Cash on hand . 500.00 

Total $1,058.21 

Canceled checks for the four-months period ended October 31, 
1920, were examined, bank balance employed reconciled with certi- 
fication of the Hamilton State Bank, and cash on hand together 
with November receipts verified as to their subsequent deposit up to 
and including November 20, 1920. 



892 BUSINESS ADMINISTRATION 

Liberty bonds, $400.00. — These bonds were submitted for our 
inspection and found to represent four one-hundred-dollar bonds of 
the fourth $\ Liberty issue. 

Customers accounts receivable $24,447.95. — A careful examination 
was made of all outstanding accounts and is reflected in detail by 
Schedule "A." This schedule also discloses the class of customers 
and territory served, and we found very few unpaid invoices dating 
over sixty days. An investigation was made as to unfilled orders on 
hand as at November 18, 1920, and the invoicing total verified to be 
$13,770.47. These orders were distributed for shipment as follows: 

Chicago factory 

Westinghouse Electric and Manufacturing Co. $2,596.85 

Other customers 4,416.93 $ 7,013.78 

Pentwater factory . 948.70 

Direct quarry shipments 5,807.99 

Total $13,770.47 

All of the foregoing orders were verified with customers original pur- 
chase requisitions. 

Merchandise inventory, $9,011.12. — Many difficulties arise in the 
determination of an accurate inventory at either cost or market 
value. Although it is true, that a physical listing might be made of 
the Chicago stock, the individual identity of the various slabs with 
original purchase invoice is not possible, due to cutting and resizing. 
The salvage of what is termed "scrap" is dependent solely upon the 
demand for small sizes. Still greater difficulties are encountered in 
computing the merchandise inventory of the Pentwater factory. 
The principal service of supply at this point is from the Brunswick- 
Balke-Collender Co. on a contract basis computed per square foot 
on what is termed "Rejects and Spoils." Cuttings of electrical slate 
procurable from these slabs vary and the identity of the cost per car- 
load is lost upon its first sorting at the plant. We have adopted 
Mr. Noel's plan of computing the inventory on the following basis: 

Inventory, January 1, 1920 (Est.) plus merchandise purchases (Janu- 
ary 1, 1920, to October 31, 1920), less cost of merchandise sold. 

Cost of merchandise sold has been determined on the following plan: 

Chicago: \ of net sales for period. 
Pentwater: \ of net sales for period. 



ANALYSIS OF A BUSINESS CASE 893 

There is little question as to the comparative accuracy at Chicago, 
as it is the practice to double the " Vermont list price" on sales. 
The ratio employed on Pentwater inventory is conservative and we 
are assured by the president, Mr. M. C. Noel, that the final total of 
this asset is extremely low. It may be noted that the inventory at 
the close of the period represents a decrease of $1,988.88 under 
January 1, 1920. 

Stock in other corporations, $10,000.00. — This represents the out- 
standing capital stock of the Noel Slate and Manufacturing Co. of 
Canada, Ltd., of which ninety-five shares ($9,500.00) have been 
originally issued to the Noel Slate and Manufacturing Co., as attested 
by Williams and Williams of Toronto, Canada, solicitors for the 
Canadian Company, and the remaining five shares ($500.00) indorsed 
over to the Illinois Corporation, as verbally stated by Mr. Noel, 
president. The statement submitted by Mr. W. G. Rightmire, 
manager at Toronto, Canada, on October 31, 1920, indicates a 
present book value of $101 . 28 per share on this stock. 

Trade acceptances receivable — discounted, $2,207 ■ IT - — This figure is 
verified by letter of Hamilton State Bank under date of November 20, 
1920, and covers four acceptances, all maturing prior to December 28, 
1920. The practice of discounting customers' paper immediately is 
followed in practically all instances. 

Sundry accounts receivable, $716 .34. — This amount is composed of 
the following personal and sundry items: 

M. C. Noel, president $ 17.71 

O. L. Lester, secretary 35. 00 

Due from carriers 290.99 

Due from government 12.50 

Noel Slate and Manufacturing Co. of Canada . . 360. 14 

Total $7i6.34 

The first two items are overdrafts against officers' salary accounts. 
The item of $290.99 covers three loss and damage claims against 
common carriers, all of which were paid during November. A claim 
for refund has been filed with the collector of internal revenue for 
rebate of $12.50 on account of excess payment on 1918 corporation 
income taxes. The account against the Canadian factory is for 
merchandise and the present level of exchange has deterred its 
settlement. 



894 BUSINESS ADMINISTRATION 

Accrued interest, $8.52. — This is the interest on Liberty Bonds 
held due October 15, 1920. 

Contracts, etc., $1 .00: — At the request of Mr. M. C. Noel, presi- 
dent, we have set up the nominal value aforestated on the contract 
entered into between the Brunswick-Balke-Collender Co. of Michigan 
and the Vermont and Pennsylvania Slate Co. on June 20, 19 16, for a 
period of ten years and assigned to the Noel Slate and Manufacturing 
Co. August 19, 1918. This contract provides for the delivery of all 
slate slabs known as "Rejects and Spoils" to the Pentwater plant at 
a price per square foot, subject to adjustment every three years. 
This adjustment is dependent upon the market value of slate preva- 
lent. This contract also places sufficient land at their disposal for 
operations at a nominal ground rent of five ($5.00) dollars per 
annum. From past observation, Mr. Noel states the minimum price 
considered for the sale of the remaining term of the contract would 
be $10,000.00. In passing, we also draw attention to the ground 
lease from the Taylor Marble Co., the value of the remaining term 
being, however, of a speculative nature. 

Deferred charges to operation, $ joy .11. — This is made up of the 
two appended items: 

Development expense $250.00 

Unexpired insurance . . 57. 11 

Total $307.11 

The development expense listed is in conjunction with the proposed 
Vermont quarry and factory, covering advance made to resident 
engineer retained at Fair Haven, Vermont. All insurance policies 
on hand were examined and unearned premiums determined there- 
from. Insurance carried is workmen's compensation, auto liability, 
and fire to the amounts of $4,000.00 at Chicago and $2,000.00 at 
Pentwater, Michigan. Policies in favor of the Corporation are also 
carried on the lives of M. C. Noel and T. E. Muir in the amounts of 
$5,000.00 and $2,500.00 respectively. There are ordinary life- 
policies taken out in May, 1919, and have, therefore, no cash sur- 
render value as at the date of this report. 

Fixed assets, $10,203 .24. — Initial charges and subsequent addi- 
tions to these accounts have been entered upon the books of account 
at cost and sufficient reserves set up to cover depreciation sustained. 

The Chicago factory is a one-story brick building (2o'X7o') 
erected in 191 5 on land sub-leased from the Taylor Marble Co., 



ANALYSIS OF A BUSINESS CASE 



895 



September 1, 1915, for a ten-year period. The Pentwater factory- 
was also erected on leased ground and is a one-story cement block 
structure built in 19 16 and turned over to the Noel Slate and Manu- 
facturing Co. two years later. Depreciation has been allowed against 
these assets with a view toward their extinguishment by August 31, 
1925, and June 19, 1926, respectively. A depreciation of 10 per cent 
per annum has been allowed against the machinery and fixtures 
account. The automobile is a 191 7 Buick roadster purchased in the 
fall of 1919, on which we have estimated the life at five years. We 
are appending a table indicating the depreciation charged against 
each class of asset since date of acquirement to October 31, 1920, 
inclusive: 



Description 


Cost 


Depreciation 


Percentage 


Net 


Buildings 


$ 5,333-75 

8,476.59 

1,068.04 

750.00 


$2,204.07 

2,699-35 
396.72 
125.00 


41 
32 
37 
17 


$ 3,129.68 

5,777-24 
671.3.2 
625.00 


Machinery 


Fixtures 


Automobile 






Total 


$15,628.38 


$5,425-l4 


35 


$10,203.24 





Bank loans payable, $1,800 .00 — This amount covers total direct 
liability to the Hamilton State Bank, as set forth in their verification 
of November 20, 1920. 

Trade acceptances payable, $4,353-93- — The' distribution and 
maturity of these acceptances are as follows: 



Date Given 


Creditor 


Date Due 


Amount 


August 9, 1920 

August 24, 1920 

September 10, 1920 

September 10, 1920 

October 10, 1920 

September 24, 1920 

September 30, 1920 

October 10, 1920 


Conrad Slate Co. 
Conrad Slate Co. 
Conrad Slate Co. 
Amos Slate Works 
Stevens Slate Co. 
Conrad Slate Co. 
Conrad Slate Co. 
Stevens Slate Co. 


November 9, 1920 
November 24, 1920 
December 9, 1920 
December 10, 1920 
December 10, 1920 
December 22, 1920 
December 29, 1920 
December 29, 1920 


$1,096.05 

1,207.76 

361.24 

124.46 

257-79 
328.75 

385.11 
592.77 


Total 






$4,353-93 









Written confirmation of the foregoing totals was secured from creditors 
on all of the foregoing items with the exception of $124.46 due the 
Amos Slate Works. 

Creditors'' accounts payable, $10,737 .18. — A careful examination 
was made to ascertain all liabilities under this caption by reference 



896 BUSINESS ADMINISTRATION 

to statements on hand and written verification from the larger 
creditors. We have included all known liabilities as of this date in 
our total figure. The present practice is to discount bills or settle 
on the creditors regular terms of thirty days net. 

Customers' allowances, $33.11. — This covers sundry refunds due 
customers on overcharges and allowances. 

Accrued pay-roll, $265 .go. — This is the total pay-roll at the Pent- 
water factory for week ending October 30, 1920. 

Sundry notes payable, $1,000.00. — This represents the balance of 
various loans from Mr. C. E. East, which are rapidly approaching 
liquidation. Interest charges thereon have been paid promptly. 

Sundry accounts payable, $214.46. — This is the unpaid balance 
to the credit of Mr. T. E. Muir, superintendent at the Pentwatr.r 
plant as of October 31, 1920, on salary and bonus account. 

Accrued liabilities, $142 .30. — We have endeavored to include all 
liabilities incurred on which no invoice has yet been rendered, and 
the foregoing figure covers the total of accruals for power, taxes, etc. 

Trade acceptances receivable — discounted, $2,207.11. — The Hamil- 
ton State Bank has confirmed this contingent liability. 

Capital, $37,606 .61. — The stock certificate book and corporation 
record were submitted for our inspection. The authorized capitaliza- 
tion is $20,000.00, consisting of two hundred shares of par value of 
$100.00 each. All the stock is outstanding and with exception of 
required nominal issues held by the president, Mr. M. C. Noel. 
Present officers and annual compensation authorized are as follows: 

^r ^ ^ , [President 1 „. 

M. C. Noel ( Treasurer J $i 2) ooo.oo 

O. L. Lesten A ^., ,•- r 2,600.00 

(Assistant Treasurer J 

The Company was incorporated under the laws of Illinois on August 5, 
1 9 14. This report indicates a present book value of outstanding 
stock of $188.03 P er share. 

PROFIT AND LOSS 

The detailed operating statement for the ten-months period is set 
forth in Exhibit III. This statement shows the operations of the 
Pentwater and Chicago factories individually, and certain of the 
administrative expenses have by necessity been charged on a pro 
rata basis. We have made this division on a percentage derived 
from the ratio of net sales of the two factories to total sales, viz: 



ANALYSIS OF A BUSINESS CASE 

Percentage 

Chicago 63 

Pentwater • . 37 



897 



Total 



100 



The appended table is an interesting reflex on operations for the 
ten-months period, setting forth the percentage of profits on gross 
income. 

Percentage 
Chicago Pentwater 

Cost of goods sold 56 . 9 

Factory expense 

Selling expense 

Administrative expense 10.7 



Net profit 
Total 



509 


349 


8.8 


20.2 


8.6 


5-9 


10.7 


16.6 


85.0 


77.6 


15.0 


22.4 


100. 


100. 



Various analyses and tests were made as to the integrity of this 
operating statement. 

GENERAL 

We are submitting the following table of earnings and sales from 
incorporation to October 31, 1920: 



Year 


Net Sales 


Net Profit and 
Compensation 
of M. C. Noel 


I9H .... 


• • $ 2,399.51 


Loss (5 mo. only) 


1915 .... 


. . 24,036.05 


$ 712.38 


1916 .... 


. . 30,265.51 


3,687.89 


1917 .... 


. . 36,109.14 


4,172.87 


1918 . , 


. . 91,314.25 


14,714.70 


1919 • , . . 


• • 52,599-14 


4,820.75 


1920 .... 


. . 107,113.16 


29,560.82 (10 mo. only) 


Total . . 


. . $343,836.76 


$57,669.41 



The loss in 1914 is attributed to the initial establishment of the 
Company. Inasmuch as this is a close corporation, in which no one 
other than Mr. M. C. Noel is vitally interested, we believe the 
earnings to be more equitably set forth by combining the net profit 
with drawings of the president. The low figure in 19 19 is due to 
inability to secure raw material and the marked increase during the 
current year to the utilization of "tailings" and "scrap" on numerous 
orders for small sizes. As stated elsewhere, the market value of this 
class of material is dependent solely upon the demand. 



898 business Administration 

HISTORICAL 

On July 1, 1914, Mr. M. C. Noel resigned from the position of 
western manager of the Conrad Slate Co., of Hydeville, Vermont, 
and opened an office at 1318 East 56th Street, Chicago, marking the 
beginning of the organization of the Noel Slate and Manufacturing Co. 
Application for incorporation was made and granted by the State of 
Illinois August 5, 1914, the initial capitalization being $2,500.00. 
On September 1, 191 5, ground was sub-leased from the Taylor 
Marble Co. and present factory erected that fall. In May, 1916, 
the capitalization was increased to $10,000.00 due to the growth of 
the business. In June, 19 18, Mr. Noel turned over the Vermont 
and Pennsylvania Slate. Co. of Pentwater, Michigan, a co-partnership, 
to the Noel Slate and Manufacturing Co. at a net value of $5,077.51, 
a figure computed on cost and the capitalization was further increased 
to $20,000.00. The present financial status of the Company is 
clearly set forth in the accompanying balance sheet. 

C. The Prospectus 

NOEL SLATE AND MANUFACTURING COMPANY 

Incorporated in Illinois, August 4, 1914 
Head Office: 1318 East 56th Street, Chicago, 111. 

Tangible assets (net worth) December 31, 1920 (approxi- 
mately) $ 40,000.00 

Conservative value of contracts, leases, and Good Will . . 75,000.00 



$115,000.00 
Proposed increase $500,000.00 

CHARACTER OF BUSINESS 

This Company has been doing a general slate business, including 
the merchandising of stock sizes, the milling and finishing of special 
sizes, and the fabrication and erection of slate interiors and fixtures 
for the building trade. The principal specialty has been slate for 
electrical purposes. 

The slate business is particularly steady and constantly growing; 
it is not affected by fad or fashion; the demand is even more constant 
than for building materials in general and it is reasonably sure to 
keep pace with the electrical industry at large; no commercially 
feasible or cheaper substitute for slate is known, whereas it is cheaper 
than marble and better than marble for a great many purposes on 
account of being non-porous and stronger. 



ANALYSIS OF A BUSINESS CASE 899 

The electrical industry alone affords a large and constantly 
increasing market for slate. Marble is becoming obsolete for switch- 
boards and slate is taking its place. Slate is used almost exclusively 
for mounting the details of controlling apparatus, rheostats, switches, 
and numerous other electrical devices. 

Our business has had a steady growth during the past six and 
one-half years, and has shown large profits on a relatively small 
invested capital. But these results are not sufficient criteria for esti- 
mating profits from our proposed new developments, for the reason 
that many of the limitations under which we have been working will 
be removed as soon as our quarry developments and Fair Haven 
Mill are completed. 

The limitations referred to may be summed up as follows: 

1. Loss of business due to scarcity of slate and consequent 
inability to meet desired deliveries. 

2. Abnormal loss from the resizing of existing stocks. 

3. The frequent payment of premiums for raw material at times 
when our own facilities were over-sold. 

4. The large number of incoming less-than-carload shipments. 

5. Loss of prestige with certain customers whose business we 
could not take care of promptly or properly. 

There has been an insistent and yet patient demand for slate — a 
demand that has been grossly ignored by most of the producers in 
that they either have not seen or have neglected their opportunity 
to meet the demand by modernizing their plants and their business 
methods. Fortunately for the industry, as far as its future is con- 
cerned, there has been no available or satisfactory substitute for 
slate. Hence, it is not too late to reclaim the ground that has been 
lost. We expect to meet the demand by adding prompt and efficient 
service to inherent values. 

Without the slightest egotism and without the possibility of 
contradiction, the Noel Slate and Manufacturing Co. is the only 
slate concern not of the old school. Practically all of our competitors 
have been "born and raised" in the business, and possibly because 
of the absence of any aggressive competition they have been content 
to plod along in the same old rut — good slate men in their own way, 
but minus the business acumen and initiative which alone can impel 
growth and increasing profits. Satisfied with being over-sold, they 
have not seen the commercial advantages of making "spot" de- 
liveries, nor of modernizing their plants in order to obtain constantly 
decreasing costs. 



900 BUSINESS ADMINISTRATION 

With a stock of active sizes (finished and semi-finished) equal 
to one or two months' output, the possibility of a shut-down due to 
accidents or labor troubles, would not be a serious matter in com- 
parison with a competitor having no finished or semi-finished stock 
on hand. 

THE DEMAND FOR ELECTRICAL SLATE 

If evidence is wanted of the uses of and demand for electrical 
slate, one has only to turn the pages of any of the several periodicals 
which are devoted to the commercial and engineering phases of the 
electrical business such as: The Electrical World, New York; The 
Electrical Review, Chicago; The Electrical Record, New York; The 
Electric Journal, Pittsburgh; Journal of Electricity, San Francisco; 
The Electrical News, Toronto, Canada; Journal of the American 
Institute of E E, New York; Electrical Merchandising, New York. 

These publications abound in illustrations of electrical and allied 
appliances which are mounted on slate bases or backs. 

There are vast industries for the production of a wide range of 
measuring, indicating, recording, and testing instruments, the sale of 
which must necessarily be attended by the sale of slate blanks upon 
which to mount them. Obviously the demand for slate will always 
be somewhat proportional to the sale of these instruments. 

At the present time, many of the principal users of electrical 
slate have large orders placed with producers of an inferior product, 
simply because they cannot obtain their requirements from their 
favorite source. 

THE FUSE INDUSTRY 

It is a well-known fact that the fuse business has become a vast 
one, there being at least ten large manufacturers of these small but 
important devices, and the business is still growing. 

Nearly all makers of fuses are large buyers of slate. 

Nearly all users of fuses are users of slate. 

Hence, the growth of the electrical slate business has been and 
will continue to be somewhat proportional to the growth of the fuse 
business, as well as to the growth of other branches of the electrical 
industry. 

THE GROWTH AND SUCCESS OF OUR BUSINESS 

The growth and success of our business may be definitely laid 
to the following main causes: 

i. The growth of the electrical industry at large. 



ANALYSIS OF A BUSINESS CASE 901 

2. The loyal and efficient services of our entire personnel, and 
especially of the superintendents of our several factories. 

3. Our never ceasing effort to keep in stock as many as possible 
of the standard and active sizes of slate, thereby out-classing all 
competition in the matter of deliveries. 

4. Our unimpeachable price policy, which had its inception in 
January, 19 16, when we published the first piece price-list, thereby 
following the lead of the window-glass industry. For nearly five 
years we were the exclusive publishers of such a list as applied to 
slate, while the only other list which has since made its appearance 
is much inferior to our current list in many important respects. 

5. The development of a large business for small sizes of slate 
thereby enabling us to make advantageous and profitable use of the 
salvage ends and tailings from larger slabs. 

6. The proximity of our Chicago, Pentwater, and Toronto 
factories to large markets for electrical slate. 

7. The persistent but conservative amount of publicity, as com- 
pared with practically no advertising on the part of our competitors. 

8. The closest possible attention to inquiries, orders, and all 
correspondence. 

The manufacture of electrical devices designed for mounting on 
slate is of itself a prodigious industry, being represented by well- 
known and highly successful concerns whose sales of these devices 
aggregated no less than $50,000,000.00 during 1920. 

Electrical application and control would be impossible without 
these devices. Their necessity insures their continued demand, as 
well as the demand for slate panels and bases upon which to mount 
them. 

ELECTRIC ELEVATORS AND CRANES 

The extensive and constantly increasing use of the electrically 
operated elevator and its never-ending improvement, create a large 
demand for slate. 

The numerous electrically operated cranes, both large and small, 
that are being installed every year, require slate control panels for 
each installation. 

The Cutler-Hammer Manufacturing Co. of Milwaukee, and 
New York, are the largest manufacturers of electric control apparatus 
in the world, having twenty-three acres of floor space, and still 
growing. This concern used about forty carloads of electrical slate 
in 1920. 



902 BUSINESS ADMINISTRATION 

OUR ORGANIZATION TO DATE 

M. C. Noel: has been president and general manager of the 
Noel Slate and Manufacturing Co. since its organization in 1914; 
has entered into a contract with the corporation to remain its active 
head for ten years from January 1, 192 1. 

J. E. Muir: has been with our Company since January 1, 1916, 
and Superintendent of our Pentwater factory since July 1, 1916. 

W. G. Rightmire : has been with us since the organization of our 
Canadian Company in January, 1919, and is now general manager 
of that property. (The outstanding stock of the Noel Slate and 
Manufacturing Co. of Canada, Ltd., is $10,000.00, all of which is 
owned by the Noel Slate and Manufacturing Co. of Illinois.) 

R. M. Whitney: a mechanical and industrial engineer with some 
previous experience in the slate business. Was retained by us in 
October, 1920, to collect certain statistical information and report on 
several phases of the slate industry of Vermont, immediately after 
which we retained his services as manager of our Vermont interests. 

Messrs. Muir, Rightmire, and Whitney are men of proven worth 
to our company and to the slate industry. They have subscribed 
liberally to our proposed new stock issue, thereby proving their 
interest and faith in our future. 

The slate industry in the United States is 170 years old. The 
best slates for electrical purposes are the black slate of Maine and 
the Cedar Mountain clear purple slate of Vermont, both having 
practically the same physical and electrical characteristics, and both 
having fine drilling qualities. The Maine slate is difficult and expen- 
sive to quarry and is about five hundred miles farther from the center 
of the electrical market than the Vermont quarries. 

The Noel Slate and Manufacturing Co. have secured a ninety- 
nine-year lease from the Lake Shore Slate Company covering the 
slate rights on their Cedar Mountain property, about five miles from 
Fair Haven, Vermont, upon which there is a known deposit of about 
15,000,000 feet of slate, which our experts advise us can be success- 
fully worked from four openings, two of which are already made. 

The full consideration for the lease mentioned above is a monthly 
rental of $300.00 beginning March i, 192 1, and is subject to can- 
cellation by us only, on thirty days' notice. The cash price asked 
by the Lake Shore Slate Company for this property was $90,000.00, 
whereas our lease gives us all the rights and advantages of ownership. 



ANALYSIS OF A BUSINESS CASE 903 

The legal sufficiency of the lease mentioned above has been 
passed upon by our Chicago and Vermont attorneys. 

The salient points of our proposed preferred stock issue are: 

1. It is a direct and the only preferred obligation of a going 
corporation which has been continuously successful since its incor- 
poration in 1914. 

2. We are engaged in a basic, extractive industry upon which 
the electrical industry is enormously dependent. There is nothing 
new or experimental about the quarrying or marketing of electrical 
slate. The demand for the product does not have to be created — 
it actually exists, and our proposed output of 100,000 feet per month 
cannot possibly satisfy the full demands of the electrical industry. 

3. In the opinion of our experts, and of the General Electric 
Company's purchasing department, the Cedar Mountain purple 
slate is the best in the Vermont Slate Belt. There is at present 
only one other operation on the same vein — that of the Conrad 
Slate Co. 

4. The net profit, after actually padding the estimated disburse- 
ments and scaling the estimated income, is conservatively placed at 
four times the fixed dividend rate on the preferred stock. 

5. About 70 per cent of the proceeds from the proposed issue of 
preferred stock will be immediately invested in tangible property 
such as quarry equipment, mill machinery, raw materials, and factory 
site, provided the latter is not obtainable as a free site from the 
town of Fair Haven for which negotiations are now pending. About 
$150,000.00 will be needed as working capital. 

D. Stock Subscription Form 

NOEL SLATE AND MANUFACTURING COMPANY 

A Corporation of the State of Illinois 

Capital Stock now issued and outstanding — $20,000.00 of one 
class, having a book value as of December 31, 1920, of approximately 
$115,000.00. 

PREFERRED STOCK AGREEMENT 

It is proposed to change the charter of the Noel Slate and Manu- 
facturing Co., an Illinois corporation, to provide for: 5,000 shares 
8 per cent cumulative sinking fund preferred stock, par value $100.00 
each; and 10,000 shares common stock, no par value. 



904 BUSINESS ADMINISTRATION 

Said preferred stock to be preferred both as to assets and dividends. 
Dividends payable either annually on December 31 or semi-annually 
on July 31 and December 31. Said preferred stock to be callable at 
par and accrued dividends on any dividend date on sixty days' 
notice to stockholders at the last address furnished the Company. 

The 10,000 shares of said common stock shall be issued to the 
present owners of the stock of the Company in exchange for their 
present shares, the owners thereof agreeing to set aside 3,000 shares of 
said common stock and to transfer same, pro rata, to the preferred stock- 
holders upon full payment of their subscriptions without further con- 
sideration. 

From the net earnings of the Company in each year, after making 
proper provision for all expenses, reserves, depreciation, depletion, 
and all dividends on the preferred stock accrued or due, there shall 
be set aside into a fund for the redemption of the preferred stock, 
not less than one-half of such net earnings. As often as the redemp- 
tion fund shows $50,000.00 accumulated therein, 500 shares, as 
near as may be of the preferred stock shall be retired pro rata on all 
stockholders, but fractional shares shall not be retired, and the 
amount apportioned to such fractional shares shall remain in said 
redemption fund for further accumulation. The remainder of such 
net earnings may be appropriated as dividends, reserved or applied 
as determined by the Board of Directors. No dividend in excess of 
$5 . 00 per share per annum on the common stock shall be paid until 
all of the preferred stock is retired. 

Said issue of preferred stock shall be a closed issue and no new 
stock or other securities or obligations shall be issued by the Company 
having a superior or equal lien on the property of the corporation 
except with the consent of two-thirds of the said preferred stock 
issued and outstanding (this provision, however, shall not apply to 
the creation of ordinary debts in the operation of the business). 

The proceeds from the sale of preferred stock shall be used for 
the purchase of a factory site at Fair Haven, Vermont (unless a 
suitable site can be leased on favorable terms), the erection of a 
modern slate mill having from 40,000 to 50,000 square feet of heated 
floor space, the equipment of same, the equipment of the necessary 
quarry developments, for working capital and for such other needs 
of the business as the Board of Directors may determine; said slate 
mill to be designed and built by Lane and Lane, industrial engineers. 



ANALYSIS OF A BUSINESS CASE 905 

The Board of Directors of the Company shall consist of seven 
members. 

The undersigned hereby subscribes to the number of shares of 
said proposed preferred stock set opposite his name, to be paid for 
when and as called for by the Board of Directors at the rate of $100.00 
per share. This subscription to be binding only in the event that 
$500,000.00 par value of said preferred stock be subscribed for and 
that said stock be authorized by the State of Illinois in accordance 
with the above provisions prior to May 1, 1921. 

Witness the Hand and Seal of the undersigned this 

day of , 1921. 

No. of Amount 
Shares 

(Seal) $ 

Subscriber's address 



INDEX 



INDEX 

JThe references are to pages] 



Absentee management, 7.68. 

Accident prevention, see Safety. 

Accommodation bills, 491. 

Accountant's report, 887. 

Accounting: administrative aid, 828; 
factor in organization, 790; records 
reflect financial policy, 469, 486; 
a source of cost information, 552; 
see also Balance sheet; Costs; Cost 
accounting; Profit and loss statement. 

Accounting department organization, 
519 (chart). 

Accounts receivable, 479, 482; assign- 
ment of, 415, 499; purchase of, 415. 

Administration, 1, 756; basic features, 
756; finance, 385; historical back- 
ground, 850; under large-scale pro- 
duction, 554; as leadership, 794; 
market, 243; mental aspects, 764; 
personnel department, 115, 226; 
production, 523; risk-bearing, 643. 

Administrative functions, 607 (chart). 

Administrator: qualities, 667; task of, 

4, TO. 

Advertising, 267; administration, 352; 
character of demand aroused, 270; 
classification, 269; co-ordination with 
sales department, 352; by manufac- 
turer, 314; reduces number of middle- 
men, 305 (chart); see also Demand 
creation. 

Advertising agency, functions, 271. 

Advertising control, 329. 

Advertising manager, 294 (chart). 

Advisory committee, 836. 

Agency: consequences, 711; formation, 
711; objects, 710; an organization 
device, 710; termination, 713. 

Agent, 739; corporation, 737; powers, 
712. 

Amalgamation, 747. 

Amortization, 462. 

Analysis: of a business problem, 772; 
industrial, 847; used in administra- 
tion, 765. 

Annuity insurance, 684. 



Application blank, 219. 

Army tests, 209. 

Assembling, 262; of a business proposi- 
tion, 391. 

Assembly process of manufacturing. 

S67. 
Assessable stock, 442. 

Assets, 476; corporate, 456; deferred, 
480. 

Associations, 716. 

Associative action: in financial admin- 
istration, 417; see also Co-operation. 
Auctions, a marketing device, 301. 
Auditor, 475. 

Automatic machinery, effect on work- 
ers. 549. 

Automobile banks, 415. 

Balance sheet, 475; analysis of, 478; 
sample, 477, 496. 

Bank check, sample, 492. 

Bank loan, information required, 495. 

Bankers: as collection agents, 411; 
influence reorganization, 466; as 
promoters, 392; as underwriters, 404. 

Banker's bills, 491. 

Banking: specialization in, 409; by 
trust companies, 423. 

Bill of exchange, 489; classification. 
490; sample, 491. 

Bond houses, 407. 

Bonds, 438, 450; classification, 448; 
ownership and transfer, 449; recitals 
in, 450; redemption, 452; risks in 
purchasing, 679; sample, 454; why 
issued, 434, 448; see also Corporate 
securities. 

Bonus system, 176, 184. 

Borrowing, to finance an enterprise, 394. 

Brand, determination of, 313. 

Bricklayer, illustration of motion study, 
589. 

Brokers, 278; help in assembling, 264; 
produce trade, 275; as promoters, 
392; as underwriters, 404. 



909 



9io 



BUSINESS ADMINISTRATION 



Budgetary control, 337, 831; limita- 
tions of, 835. 

Budgets: cash, 520; sales, 333. 

Bush terminal, 101. 

Business activities, classification, 4. 

Business administration, see Adminis- 
tration. 

Business case, analysis of, 854. 

Business depression, 662. 

Business education, vii; elements of 
curriculum, viii. 

Business judgment, see Judgment. 
Business manager, see Administrator. 
Business organization, see Organization. 
Business problems, character of, 644. 
Business risk, see Risk- 
Business unit: form of, 696; tests of 
efficiency, 703; see also, Corporation; 
Individual proprietorship; Partner- 
ship. 

Buying, 366, 369, 367, (chart); aids to, 

369; see also, Purchasing. 
Buying records, 367. 
By-laws, 736. 
By-products, 569. 

California Fruit Grower's Exchange, 
276. 

Call loans, 412. 

Callable preferred stock, 444. 

Capital, 433; changes in volume of, 429; 

fears of, 164; immobility, 550; and 

labor, 127, 168; risks, 678. 

Capitalization, 433, 438. 

Captains of industry, 851. 

Case, analysis of business, 854. 

Case and problem method, x, xi. 

Cash, 479; budget estimates, 520. 

Central manufacturing district, 96. 

Centralization of control, protest 
against, 602. 

Centralized personnel department, 231. 
Chain-store system, 257, 284; classifica- 
tion, 296, organization, 298 (chart). 

Chance, 659; see also Risks. 
Channels of distribution, 317. 
Charter: corporation 436; object 
clause, 732. 

Check system, value, 411. 

Cities: advantages and disadvantages 
for plant location, 79, 84; satellite. 
80. 



City advertising, 106. 

City planning: Boston, 112 (map); 
purposes, scope, methods, 109; Tor- 
rance, 113 (map). 

Classification, 591 ; an aid to knowledge 
of facts, 757; manufacturing prob- 
lems, 570. 

Climate, importance in plant location, 
30, 40, 95. 

Club buying, 368 (chart). 
Collection by bankers, 411. 
Combinations, 746. 
Commercial acceptance trust, 415. 
Commercial banks, 410; part of 

financial organization, 401. 
Commercial bill, 491. 

Commercial centers: Baltimore, 108; 
Boston, 112 (map); Chicago, 98; 
location, 50; New York City, 84; 
Philadelphia, 106; United States, 55. 

Commercial credit institutions, 410, 415. 
Commercial credit instruments, 469, 

488, 498. 
Commercial enterprises, corporate form 

in, 705 .^ 
Commercial loans, 412. 
Commercial paper houses, 414. 
Commercial risks, 659. 
Commission houses, 277. 
Commission merchants, 275; assemble 

produce, 264. 
Committee system, 806. 
Commodity analysis, 323. 
Common stock, 438, 442; see also 

Corporate securities. 
Communicating aids: of control, 823; 

of production, 581, 584, 586, 588, 

589, 59i, 595. 
Companies Act, 436, 720. 
Company store, 283. 
Comparison: in production, 574; use 

in administration, 813. 

Competition, sometimes dangerous, 552. 

Comptroller, 512; 606 (chart); super- 
vises budget, 832. 

Concentration: automobile products, 
49 (map); causes of, 46; of control, 
745 ; cotton spinning, 44 (map) ; flour 
mills, 50 (map); of industries, 45; 
lumber products, 49 (map); manu- 
facture of utilities, 323; manufactures 
in New York, 84; manufacturing, 
(48) map. 

Consolidation, 746. 



INDEX 



911 



Constant cost, see Costs. 
Construction: manufacturing plant, 
563; unit system, 565. 

Consumer: co-operative chain stores, 
298; determines plant location, 30, 
86, 95; needs determine demand, 332. 

Consumer's goods, marketing of, 302. 

Consumption per capita use in market 
analysis, 321. 

Contingent liabilities, 481, 497. 

Continuous process, 563, 784. 

Control: budgetary, 832; concentra- 
tion of, 745; department, 585; of 
effort, 814; factors of, 785; graphic, 
584; large- vs. small- scale industry, 
602; measuring and communicating 
aids, 823; organization of, 14; 
production, 556, 573; under scientific 
management, 617, 631; by share- 
holders, 438; zones of business, 3; 
see also Measuring aids. 

Convertible preferred stock, 444. 

Co-operation, 751; in financial adminis- 
tration, 417; reduces risk, 670. 

Co-operation of specialists, 248; rela- 
tion to marketing, 261; see also 
Specialists; Specialization. 

Co-operative buying syndicates, 263. 

Co-operative stores. 286. 

Co-operative wholesale associations, 
274. 

Corporate assets, 456. 

Corporate directors, liability of, 739. 

Corporate financing, 438; diagram, 403. 

Corporate form: compared with part- 
nership, 716; importance, 705; re- 
duces risk, 674; when used, 696. 

Corporate policy, in issuing securities, 

456. 
Corporate reorganization, 465. 

Corporate securities, 433, 434, 438; 

issuance, 456; underwriting. 405; 

value, 45 7 ; see also, Stocks; Bonds. 
Corporate suretyship, see Suretyship. 
Corporate trusts, 424. 
Corporation, 705; charter, 436, 730; 

dissolution, 744; history of, 727; 

objects, 732; sale of property, 737; 

see also Business unit; Corporate 

form. 

Cost accounting, 259, 574, 595, 601; 

services of, 597; system, 636. 
Cost of starting a business, 389. 



Costs: basis for capitalization, 433; 

basis of, in manufacturing, 600; 

beginnings of study, 612; of machin- 

er y> 579J variables in, 599. 
Cotton manufacturing : advantages and 

disadvantages of southern location, 

40; location, 38; risk of price changes 

in, 661. 

Country, advantages and disadvantages 
for plant location, 79. 

Coupon bonds, 449. 

Creative instinct, 154. 

Credit department, 419. 

Credit extension, 488; legislation, 418; 
for marketing, 266; terms of, affects 
working capital, 397; trade, 492. 

Credit information, 475. 

Credit manager, jobbing house 281. 

Credit men, National Association of, 
418. 

Cumulative preferred stock, 443. 

Current assets, 476, 479. 

Current liabilities, 476, 480; policies 
respecting, 487. 

Debenture stock, 445. 
Deferred assets, 480. 

Demand: analysis, 315, changes affect 
price, 344; elastic, 348. 

Demand creation, 267; a goal of sales 
management, 309; see also Advertis- 
ing. 

Demand loans, 412. 

Department stores, 284; characteristics, 
291; number, 291; organization, 293, 
294 (chart); relation to manufacturer, 
295- 

Depreciation, 501, 507. 

Description of occupations, 202, see also 
Job analysis. 

Design, 570; of machinery, 579. 

Deterioration, risk in marketing, 266. 

Differential piece rate, 613. 

Differentiation of products, 346. 

Direct cost, see Costs. 

Direct selling, 257. 

Director, 740. 

Disassembly process of production, 569. 

Disciplinarian, 621. 

Discipline, a factor in organization, 790, 
822. 

Discount house, 415. 



912 



BUSINESS ADMINISTRATION 



Dispersion, see Concentration. 
Distribution, analysis, 317. 
Dividend policy, 486, 509. 
Domestic credits, 429. 
Draft, 489. 
Dynamic risks, 655 

Earnings, basis for capitalization, 433. 
Economic activity, forms of, 2. 
Economic organization, forces respon- 
sible for, 256. 

Economic selection, 842. 

Education: expansion related to mar- 
keting, 261; technical, 536; see also 
Training. 

Efficiency, reasons for lack of, 132. 

Elastic demand, 348. 

Employee representation, 187; an ex- 
treme case, 188. 

Employment division, 119; 124, 241, 
608 (charts); selection and placement, 
146; see also Personnel department. 

Endowment insurance, 685. 

Engineering concerns: as financing 
houses, 409; as promoters, 392. 

Engineering, contribution to produc- 
tion, 539. 

Engineer's report, 855. 

Entrep6t: causes of decline, 53; natural 
trade of, 52. 

Environment, physical, 11. 

Equipment, of manufacturing plants, 

572. 
Esprit de corps, 158, 605, 790, 807, 

817^ 
Executive, see Administrator. 
Executive committee, 743. 
Executives, in early development of the 

United States, 851. 
Expenditures, control of 832, 834. 
Expense distribution, 595, 601; see also 

Cost accounting. 
Expense standards, 333. 
Experience, use in management, 813. 
Extractive industry, location, 28. 

Factories, location, 73. 

Facts, basis for action, 757. 

Fatigue, 195; detection of, 196; methods 

of reducing, 140. 
Fidelity insurance, 693. 



Finance administration, 12,385; organ- 
ization for, 512, 812, 518 (chart); 
standards, 520; unsettled problems 
of, 385. 

Finance company, 415. 

Financial centers, 58. 

Financial manager, duties of, 512. 

Financial organization of society, 398; 
use by business manager, 400. 

Financial policies, 251, 429, 469; deter- 
mination, 240; elements of, 486; 
Ford case, 510; influenced by fore- 
casting, 422. 

Financial problems: marketing, 266; 
starting a business, 388. 

Financial program, formulation of, 834. 

Financial services, 420; utility to 
manager, 421. 

Financial standards, 520. 

Financial statements, 470, 475. 

Financing, 391; corporate, 403 (dia- 
gram); methods of, 392; non- 
corporate, 402 (diagram); partner- 
ship, 39s ; side line, 394. 

Fixed assets, 476; valuation of, 478. 

Fixed capital, 396; increases risk, 663. 

Fixed liabilities, 476, 481. 

Follow up: personnel, 149; production, 
636. 

Forecasting: reduces risks, 670; ser- 
vices, 420. 

Foreign exchange, 429. 

Foreman, 147, 152, 200, 223; duties of , 
618; inspection by, 583. 

Founders' stock, 445. 

Fraternal organization, 716. 

Freight rates, see Transportation rates. 

Fuel supply, important in plant loca- 
tion, 29. 

Full paid stock, 441. 

Functional foreman, 618. 

Functional middlemen, see Middlemen. 

Functional organization, 617; diagram, 
620. 

Functions of administration, 1. 

Functions in manufacturing, 570. 

Future trading facilities, a marketing 
device, 301. 

Futures, 273, 690. 

Grading, 267. 
Grievances, 235. 



INDEX 



913 



Gross earnings, disposition of, 470. 
Group relations, 126 (chart). 
Guaranteed stock, 445. 
Guaranty, reduces risk, 683, 692. 

Health division, 124, 126, 241 (charts); 

occupational disease, 138. 
Hedging, 688; reduces risks, 683. 
Hiring specifications, 197. 
Hours of work, 143. 
Human analogy, organization, 808. 
Human equation, in business problems, 

649. 

Importers, 263. 

Incentives, 153, 817; absence of, 171; 
history of, 154; and output, 127. 

Incorporation, results of, 724. 

Indexes of business conditions, 420. 

Indirect costs: relation to marketing, 
258, 260; see also Costs. 

Individual proprietorship, 708; finan- 
cing, 402 (diagram); when used, 696; 
see also Business unit; Small shop. 

Industrial imitation, 86; in plant 
location, 35. 

Industrial plants: Central Manufactur- 
ing District, 99; classification, 565; 
construction and equipment, in rela- 
tion to site location, 76. 

Industrial representation, see Employee 
representation. 

Industrial Revolution, 256. 

Industrial risk, see Risks. 

Industrial society: financial organiza- 
tion of, 398; forces causing change, 
17; specialists in, 243. 

Industrial unrest, 164, 664; encouraged 
by scientific management, 641. 

Inspection, 581, 574; by purchasing 
department, 366; purposes of, 581. 

Inspector, 619; duties of, 582. 

Instincts, 168. 

Instruction card, 620. 

Insurance, 683; fidelity, 693; organized 
suretyship, 693; principles of, 676; 
when not needed, 686; see also Risks. 

Insurance companies : as financial insti- 
tutions, 425; as investors, 407; part 
of the financial organization, 401. 

Intelligence test, 209; rating, 210; use 
of, 211. 



Interchangeable system, in production, 

S63. 
Interdependence : of business problems, 

378; increases risk, 661. 
Interlocking directorates, a marketing 

device, 301. 
Intel view, 220. 

Interviewer, qualifications, 221. 
Introduction of new employees, see 

Placement. 

Inventory, valuation of, 480. 
Investment: encouraged by limited 

liability, 677; risks of, 678. 
Investment banking, 407; part of 

financial organization, 401. 

Investment credit institutions, 404. 
Investment loans, 412. 
Invoices, 366. 

Job analysis, 122, 197; how to make, 
200; reasons for, results of, 198; 
samples, 202. 

Job classification, 199. 

Job specification, 197. 

Jobber, 262, 279; chain store, 297; dry 
goods, 57; fruit and produce trade, 
275; relation to orthodox system of 
distribution, 306. 

Jobbing contractors, 301. 

Joint stock company, 716; character- 
istics of, 722. 

Judgment, 644, 651; analysis of, 768; 
confidence in, 668; of financial mana- 
ger, 470. 

Keyed copy, in advertising, 329. 

Labor: and capital, 127, 168; fears of , 
164; inefficiency, 135; objections to 
scientific management, 639, 846; 
risks of, 678; see also Personnel. 

Labor administrator, 232. 

Labor audit, 122-23; uses of, 224. 

Labor policies, 235, 238. 

Labor reserve, a necessary cost, 669. 

Labor supply: Central Manufacturing 
District, 99; 126 (chart); determines 
plant location, 31, 42, 95; New York 
City, 85. 

Labor turnover, 124 (chart). 

Large-scale production: advantages, 
553; control, 602; reduces risks, 670. 
673; relation to marketing, 260. 



914 



BUSINESS ADMINISTRATION 



Law, see Social control. 

Law of large numbers, reduces risks, 
671, 682. 

Laws of administration, 756, 791. 

Lawyers, as promoters, 392. 

Layout, 563; under scientific manage- 
ment, 616. 

Leadership, 794, 818; industrial, 850. 

Lease and royalty contracts, a market- 
ing device, 301. 

Liability, 476, 481, 698, 704; of corpo- 
rate directors, 739; of trustees, 750. 

Life insurance, 683. 

Limited liability, 698; encourages 
investment, 676. 

Limited partnership, 718. 

Limited Partnership Act, 720. 

Line and staff organization, 800. 

Lloyds' insurance, 687. 

Loans : classified, 412; ways of making, 
412. 

Local concentration, see Concentra- 
tion. 

Location, 557; see also Plant location. 

London, as a financial center, 58. 

Machine industry, see Technological 
industry. 

Machinery: educative influence, 547; 
installation, 580; selection of, 579. 

Mail-order business, 257, 259, 285, 287; 

competition with local retailers, 289; 

organization, 288 (chart); wholesale 

dry goods, 58. 
Mail orders, advantages, and disadvan- 

ages, 368 (chart). 

Maintenance, of equipment, 572. 

Management: faults of, 132; "laws," 
792; types of, 621; see also Admin- 
istration. 

Manager, see Administrator. 

Manufacturer: chain-store system, 297; 
marketing problems, 313; relation to 
department store, 295; relation to 
orthodox system of distribution, 306. 

Manufacturer's agent, 278. 

Manufacturer's retail branches, 285; 
chain stores, 297. 

Manufacturing: character of owner- 
ship, 706; history of development, 
577; importance of corporate form, 
705; plant equipment, 572; value of 
products, 706; what is involved, 560; 
see also Production. 



Manufacturing business: organization, 
606 (chart); sales management, 308. 
Map system, for sales control, 325. 
Margin buying, 273. 

Market, 249; analysis, 313, 314, 319; 
area increasing, 259; monopoly, 345. 
Market administration, 243, 352. 
Market forces, 250. 

Market functions, 250, 262; develop- 
ment of, 246. 

Market price, 343. 

Market structures, 250; by classes of 
commodities, 299; forces shaping, 
256, 259. 

Marketing, 12; changes in method, 304 
(chart); large-scale, 554; problems of 
manufacturer, 313; of producer's 
goods, 301; and production problems, 
647; of raw materials, 299; systems 
of distribution, 257. 

Master plan, of sales department, 356. 

Measuring aids: of control, 14, 823; 
financial administration, 420, 475, 
482, 486, 495, 520; market adminis- 
tration, 309, 325,^ 329, 331, 335, 337; 
personnel administration, 192, 195, 
204, 206, 219, 220, 221; in plant 
location, 93; of production, 581, 584, 
586, 588, 589, 591, 595 ; purchasing, 

37i. 
Mediums, advertising, 329. 

Men, as purchasers, 3 24. 

Mercantile agency, history, 415. 

Merchandising plans, 341. 

Merger, 747. 

Middlemen: in distribution, 303 ; evolu- 
tion of, 304 (chart); functions, 246, 
262; tendency to reduce number, 
305 (chart). ^ 

Military organization, 779, 800. 

Mining partnerships, 714. 

Mnemonics, 593. 

Momentum of early start, 35, 84. 

Money market, 429. 

Monopoly: marketing, 259, 344; price, 

345- 
Monotony, reduction, 141. 

Mortgage bond, 451. 

Mortgages, open and closed, when 

issued, 460. 
Motion study, 589; range of, 844. 
Motivation, see Incentives. 

Name for product, 315. 
National advertising, 259. 



INDEX 



915 



National Association of Credit Men, 
417; rules for mark-up, 340. 

National Metal Trades Association, 
employee relations, 191. 

Net worth, 476, 481. 

New York City: financial center, 58; 
market, 319. 

Night work, 143. 

Note brokers, justification for, 413. 

Note selling, 493. 

Notes payable, 480. 

Notes receivable, 479. 

Obsolescence, 463, 503, 507. 
Occupational disease, 138, 146. 
Operating expenses, 334. 
Operation of manufacturing plants, 576. 
Ordinary partnership, 714. 
Organization: essentials of, 788; factors 

of control, 785; for financial adminis- 
tration, 512, 518; interdependence of 
functions, 378; personnel depart- 
ment, 226; place of personnel depart- 
ment 236; place of risk bearing, 694; 
sales department, 354; setting up of, 
756; significance to administrator, 
15; no single correct form, 778; of 
specialists, 17; specialization, 783; 
types of, 799. 

Organization charts, 237, 695; account- 
ing, 519; chain drug-stores, 298; 
department store, 294; finance ad- 
ministration, 518; human analogy, 
808; interrelation of departments, 
608; mail-order house, 288; manu- 
facturing and selling business, 19, 
606; personnel department. 125, 126, 
237, 241; wholesale house, 280. 

Organized market: conditions needed 
for, 272; hedging, 688; price in, 344. 

Original cost, basis for capitalization, 

433. 
Orthodox system of distribution, 

changes from, 257, 259; breakup 

of, 306; types, 303. 
Output, 127; conditions precedent, 128; 

at any cost, 155; see also Incentives. 

Overhead costs, see Indirect costs; 

Costs. 
Overtime, 143. 

Par value, 440. 
Parasitic industries, 87. 
Participating preferred stock, 444. 



Partnership, 714; articles of, 718; 
changed to corporation, 459; finan- 
cing, 395, 402 (diagram), 440; powers 
of, 734; termination, 717; when used, 
696; see also Business unit. 

Partnership association, 719. 

Pensions, 184. 

Perpetual inventory, 307. 

Personal effectiveness, in management, 
817. 

Personnel: executives relationship to, 
12, 115; service facilities, Bush 
Terminal, 104. 

Personnel administration, 115, 227; 
co-ordination with production, 237 
(chart); measuring aids, 192; spirit 
of, 159, 236. 

Personnel committee, 238. 

Personnel department, 116, 226; ad- 
ministration, 226; functions, 124 
126 (charts); goal of, 227; organiza- 
tion, 118, 226; 241, 606 (charts); place 
in business organization, 236; records, 
122, 145, 186; size, 119. 

Personnel policies, 235, 238. 

Phrenology, 213; errors of, 214. 

Physical examination, 144. 

Physical fitness, maintenance, 140. 

Physical supply, a goal of sales manage- 
ment, 309. 

Physiognomy, 213, errors of, 216. 

Piece work, 173, differential rate, 179. 

Placement, 146. 

Planning, 568, 756, 831; importance of, 
644. 

Planning department, 624, 630; bulletin 
board of, 632. 

Plant construction, 557. 

Plant, physical conditions, 136. 

Plant location, 23, 93; agencies aiding 
business manager, 90, 96, 101, 105; 
forces detennining, 28, 6o, 83, 84, 88; 
subareas, 62. 

Policies: concerning issuance of securi- 
ties, 456; financial, 240, 469, 486; 
influenced by forecasting, 422; per- 
sonnel, 235, 238; price, 340; produc- 
tion, 239, 251, 598; reorganization, 
465; sales, 239, 251, 313. 

Policy formation, 251, 650, 756; train- 
ing for, 759. 

Ports, classes of, 51. 
Power, determines plant location, 30, 
39, 42, 95- 



916 



BUSINESS ADMINISTRATION 



Preferred stock, 438, 443; when issued, 
458. 

President: control of budgetary pro- 
gram, 836; duties, 811. 

Price: knowledge of, for buying, 367; 
in world-market, 658, 661. 

Price fluctuation: desirable for organ- 
ized market, 273; forecasting, 420; 
risk in marketing, 265. 

Price maintenance, 351. 

Price policies: determination, 343; dis- 
tributor's, 347; follow the leader, 
346; mark-up, 340; turnover, 341. 

Prime cost, see Costs. 
Principles: of administration, 756, 796; 
of organization, 791. 

Prior liens, intensify risk, 682. 

Private property, 643. 

Problem solving, 770. 

Producer's goods, marketing of, 301. 

Product, analysis, 314. 

Production: administration, 523; char- 
acteristics of variable branches, 675; 
contribution of engineering, 539; 
control, 556; co-ordination with sales, 
834; graphic control, 584; inter- 
changeable system, 563; and market- 
ing problems, 647; scientific back- 
ground, 523; 530; scientific man- 
agement, 615; stages of, 624; see 
also Manufacturing; Scientific man- 
agement; Technology. 

Production department, 608 (chart). 

Production policies, determination, 239, 
251, 598. 

Profit and loss statement, 335; analysis 
of, 482; diagram, 485; samples, 336, 
483, 497- 

Profit sharing, 183. 

Progress chart, 586. 

Promissory note, 488. 

Promoter, 390; classification of, 391. 

Promotion, 390, 429, 703; Three- 
Position Plan, 185. 

Prospectus, 898. 

Psychological test, objections to, 204. 

Psychology of business judgments, 769. 

Public markets, 286. 

Purchasing, 263, 366, 369; administra- 
tion, 250, 374; interdependence with 
other functions, 378; testing, 370; 
see also, Buying; Marketing. 

Purchasing agent, 263, 277, 362, 663. 
Purchasing department, functions, 365. 



Quality, analysis of product, 315. 
Quick assets, 396. 
Quotas, 337. 

Ratification, 712, 737. 

Rating scales, 221; army, 222; fore- 
man, 223. 

Raw material: marketing, 299; relation 
to plant location, 95; shipment, 52. 

Recess periods, 140. 

Records: advertising results, 330; 
buying, 367; for control, 624; a 
factor in organization, 790; insepar- 
able from standards, 839; personnel 
department, 122, 145, 186; produc- 
tion, 633; sales, 326, 646. 

Records and research, 126 (chart). 
Recruiting, 126 (chart). 
Reflective thinking, elements of, 770. 
Registered bonds, 450, 452. 
Regulative principles of management, 

813. 
Reorganization, 465; policies, 465; use 

of preferred stock in, 459. 

Reports: for chief executive, 826; 
parties interested in, 830. 

Reproduction cost, basis for capitaliza- 
tion, 433. 

Research: justification, 651; produc- 
tion, 566; to reduce risk, 669; sales, 

355- 
Research division, 121, 124 (chart). 

Reserves, 481; created from surplus, 
506; reduce risks, 669. 

Responsibility, a factor in organization, 
789. 

Retail agencies, 282; bulk retailer, 287; 
chain store, 284, 396; company store, 
283; co-operative store, 286; depart- 
ment store, 284; mail-order house, 
285; manufacturer's retail branches, 
285; public market, 286; retail 
wholesale stores, 283; specialty store, 
283; unit stores, 282; wagon retailer, 
286. 

Retail stores, location, 66, 71. 

Retail- wholesale store, 283. 

Retailers, 262; in distribution, 305 
(chart); mail-order competition, 289. 

Risk: capital investment, 673; elimina- 
tion by combination, 671; forms of, 
654; industrial, 659; in merchandis- 
ing, 265; prevents improvement in 
methods, 673; reduced through 
research, 669; of shareholders, 438; 
ways of dealing with, 664. 



INDEX 



917 



Risk bearing, administration of , 13, 643; 
place in business organization, 694. 

Routing, 563, 626, 635, 627 (chart). 

Sabotage, causes of, 1 70 

Safety, 136; 126, 241, 124 (charts); 

devices, 138; National Safety 

Council, 137. 
Sale: by description, 269; by sample, 

269. 
Sales administration, 352; manufactur- 
ing business, 308. 
Sales budgets, checked with expense 

standards, 333. 
Sales department: co-ordination with 

advertising, 352; master plan, 356; 

organization, 354, 812, 358 (chart), 

606; with production, 834; schedules, 

356, 359, 361. 
Sales force, management, 313. 
Sales manager, problems of, 308. 
Sales policies, 251; determination, 239; 

manufacturer's, 313. 
Sales quota, 322, 338. 
Sales records, 326, 648. 
Sales service, Bush Terminal, 104. 
Salesmen: control, 325; elimination, 

268; necessity for, 280; used to 

reduce number of middlemen, 305 

(chart); value of, 328. 
Sanitation, 124, 142; outside the plant, 

144. 

Satellite cities, 80; Chicago, 81 (map); 
St. Louis, 82 (map). 

Savings banks, 426; as investors, 407, 
427; a part of the financial organiza- 
tion, 401. 

Schools of technology, 258, 536. 

Science : the basis of business facts, 757; 
contribution to production, 523, 530; 
diagram, 539; history of, 525; im- 
portance, 644. 

Scientific management, 157, 555, 608, 
623, 820, 839, 844; beginnings of, 
619; bricklayer illustration, 591; 
field of, 646; forces behind, 259, 
forms of wage payment, 174, 178; 
fundamental idea of, 758; objections 
to, 639; principles of, 615; purchas- 
ing department, 376; unscientific 
character of, 641; value of, 637; see 
also Taylor System. 

Scientific method, 654. 

Seats for workers, 141. 

Selection, 122, 146; economic, 842. 



Selling, 267; administration, 250; func- 
tions of, 354; at the market minus, 
347, 348 (chart); at the market plus, 
349, 350 (chart); methods, 268; see 
also Marketing. 

Selling agent, in distribution, 305 

(charts) . 
Selling houses, 277. 
Service, personnel, 125 126, (charts); 

see also Personnel department. 

Service facilities, 87; Bush Terminal, 
102; Central Manufacturing Dis- 
trict, 100. 

Shareholders: control by, 438; powers 
of, 734; risk of, 438. 

Shop committees, see Employee repre- 
sentation. 

Shopping lines, 324. 

Short-term loans, 492. 

Short-term notes, why issued, 434. 

Side-line financing, 394. 

Sinking fund, 462; created from sur- 
plus, 509. 

Site location, 62, 71, 73, 74, 76, 96. 

Size of maximum efficiency, 555, 601. 

Skill: necessary in machine industry, 
548; transfer to machinery, 543. 

Sleeping partner, 721. 

Small shop: advantages of, 554, in 
control, 604; see also Individual 
proprietorship. 

Social control, 128; executive's rela- 
tionship to, 13; importance in plant 
location, 95; related to form of 
business unit, 699; relation to 
marketing, 261; see also Control. 

Social environment, analysis of, 331. 

Sorting, 267. . 

Special partnerships, 714. 

Specialists: aid administrator, 787; 
increase risk, 663; reduce risk, 670. 

Specialization: affects organization, 
783, 789; co-ordination of specialists, 
16, 243; development of, 244 (dia- 
gram) ; by financial institutions, 404, 
409; functions, 247 (diagram); geo- 
graphical, by broad areas, 23; 
increases risk, 657, 661 ; in inspection, 
581; of machinery, 543 ; management 
of labor, 233; in marketing, 259, 262; 
products, 346; in risk-bearing, 683, 
692; by small areas, 64, in; value 
of, 545- 

Specialized centers, in plant location, 
37. 



918 



BUSINESS ADMINISTRATION 



Specialty store, 283. 

Specification, sample, 371. 

Speculation, 265, 657. 

Speculative contracts: dangers of, 690; 
reduce risk, 687. 

Speculative industries, 675. 

Speculative insurance, 686, 687. 

Spring balance test, 195. 

Standard of living, relation to market- 
ing, 261. 

Standardization, 838; manufacturing 
and production, 555, 574, 634, 648; 
records necessary, 839. 

Standards, 568; administrative, 757; 
determined by statistics, 823; finan- 
cial, 520; in marketing, 648; pur- 
chasing, 370; of science, 645. 

Starting a business, 388; costs of, 389. 

Static risks, 655. 

Statistics: in business, 823; in market 
analysis, 320; in organization, 790. 

Stock certificate, sample, 446. 
Stock exchange, 427. 
Stock market, 429; part of financial 
organization, 401. 

Stock subscription form, 903. 
Stockholders, 438; powers of, 734. 
Stocks: classification of, 440; risk in 
purchase, 679; why issued, 434, 438. 

Stores department, 374. _ 

Stores systems, 634. 

Stores, work of purchasing department, 

366. 
Storing, 264. 
Strength tests, 195. 
Strikes, fear of, 166. 
Style goods, 323. 
Subsidiary industries, 87. 
Suburbs, for plant location, 80. 
Sunday work, 143. 

Supply: analysis of product, 315; 

changes affect price, 344. 
Suretyship, 693; reduces risk, 683, 

692. 
Surplus: reflects financial policy, 505; 

sources of, 505; unavailable for 

dividends, 509; uses of, 506. 

Symbols, 591. 

Synthesis, used in administration, 765. 
System, a factor in organization, 789. 
Systematized management, 622; stores 
department, 375. 



Taylor System, 359, 361; see also, 
Scientific management. 

Technical education, 536. 

Technological industry, 524; advan- 
tages, 553; complexity, 550; conse- 
quences, 543. 

Technology: executive's relationship to, 
n, 523; schools of, 258, 536. 

Territory, of salesmen, 327. 

Testing, 574; of purchases, 370. 

Tests: of advertising copy, 329; fore- 
man, 223; intelligence, 209; psycho- 
logical, 204; trade, 209; U. S. Army, 
223; vocational, 206. 

Time study, 588, 628, 636; range of, 
844; records, 625. 

Time work, 174. 

Toledo Factories Building, 105. 

Trade acceptance, sample, 490. 

Trade credit, 492; when disadvanta- 
geous, 493. 

Trade-mark policies, 313. 

Trade tests, 209, 212. 

Traffic, 366. 

Traffic Bureau, Central Manufacturing 
District, 98. 

Training, 149; methods, 151; technical, 
536. 

Training division, 121; 1 24, 241 (charts) . 

Transportation : importance in location 
of commercial cities, 50, 53; relation 
to site location, 74, 268. 

Transportation facilities: Bush Termi- 
nal, 101; Central Manufacturing 
District, 97; New York City, 84; 
plant location, 33. 

Transportation rates, 39, 41, 95. 

Treasurer, 512, 515. 

Treasury stock, 441. 

Trust companies: functions, 423; as 

investors, 407; part of financial 

organization, 403. 
Trust deed, 461. 
Trustee, 739, 748. 
Trusts, simple, 748. 
Turnover, 341; and working capital, 

397- 
" Two-Plane " plan of organization, 810. 

Ultra vires, doctrine of, 738. 
Uncertainty, 659; see also Risks. 
Underwriters, 404; a marketing device, 
301. 



INDEX 



919 



Underwriting: advantages of, 404; 

reduced risks, 692; when advisable, 

405. 
Underwriting syndicates, 406. 
Unissued stock, 441. 
Unit store, 282. 
"Unit" system: of organization, 801; 

of plant construction, 565. 
Unsystemized management, 621, 622 

(chart); stores department, 374. 

Utilities, marketing, 323. 

Ventilation, of workrooms, 142. 
Vocational guidance, 205. 
Vocational testing, methods, 206. 

Wage-earners, in manufacturing indus- 
tries, 706. 

Wage payment: basic rate, 183; effect 
on financial policy, 488; factors 
considered, 180; fair wages, 181; 
incentive, 156; methods, 173, 613; 
a philosophy of management, 178; 
profit sharing, 183; workmen and 
management points of view, 1 76. 

Wages, determination of salesmen's 
salaries, 328; in market analysis, 321. 



Wagon retailers, 286. 
Wall Street, 428. 

Warehouses: general, 264; location, 73; 
specialized, 265. 

Waste products, in plant location, 95. 

Wasting assets, 462. 

Wealth statistics, in market analysis, 
321. 

Welfare work, see Personnel depart- 
ment. 

Wholesale agencies, 274; location, 72; 
organization, 280 (chart). 

Wholesaler, 262; in distribution, 305 
(chart); mail-order houses, 274; 
service to retailers, 281; specialty, 
f74. 

Will to do, 153, 158; see also Incentives, 

Women, as purchasers, 3 24. 

Workers: educative influence of 
machinery on, 547; see also Labor; 
Personnel. 

Working capital: forms of, 396; and 
trade credit, 397; volume of, 396. 

Working conditions, 141, 201; see also 
Fatigue; Safety; Sanitation; Venti- 
lation. 

Workmen's compensation, 137. 



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